General Electric Is a Risky Bet, But Not Over the Long Term

The pandemic couldn’t have caught industrial giant General Electric (NYSE:GE) at a worse time. The company was making progress in early 2020, but Covid-19 played spoil-sport and disrupted its businesses. Based on a recent investor update, GE faces multiple headwinds that should hurt its third-quarter results. However, most of its troubles are likely to be temporary. GE stock is still a good long-term play.

Recently, a 1-for-8 reverse stock split also led to a surge in the GE price, landing it in the current range around $100. The split reduced the share count from roughly 8.8 billion to 1.1 billion. Lately, though, the stock hasn’t been performing that well, trailing the S&P 500.

However, GE stock trading is still in line with sector averages and is slightly undervalued based on forward sales estimates. Additionally, analysts feel that it’s trading at about a 17% discount, based on consensus estimates. Therefore, it’s probably best to grab this stock while it’s down, before GE recovers substantially in the quarters to come.

GE Stock: Possible Difficulties in the Third Quarter

GE’s strategy is clear. The company plans for GE Aviation to return to its winning ways and for GE Healthcare, Power and Renewable Energy to remain solid cash flow and earnings generators with strong margins. However, the recent update from Steve Winoker, Vice President of Investor Relations, suggests that there’s likely some turbulence ahead.

For the commercial aviation division, Winoker talked about the potential impact of the delta variant. However, the VP also stated that GE doesn’t “foresee a change to our shop visit expectations that we have provided.” So, going off of this, the company’s commercial aviation aftermarket sales may still come in line with expectations.

Perhaps what’s more concerning, though, are GE’s supply-chain issues. These troubles hit its military business in Q2. That’s something investors should watch out for moving forward, along with a potential slowdown in flight departures.

GE Healthcare is also likely to come under the most duress due to these supply chain issues. According to Winoker, the business may face “sustained pressure” in Q3 and Q4. This is a major concern for GE stock investors, given the importance of the segment’s cash flows for the company.

Strength in Other Segments

That all said, GE Power is likely to be the least impacted segment. Winoker seemed confident that the division will achieve guidance. What’s more, the company noted the segment’s strength in the Q2 earnings call.

Finally, though, there’s the renewable energy business. GE Renewable Energy was a top performer in Q2. However, in the investor update, Winoker did talk about potential risks for orders due to the U.S. wind production tax credit (PTC). Basically, a PTC extension could hurt orders, as GE’s customers may want to defer spending. Still, this development may turn out to be an overall positive long-term.

Surprisingly enough, there was also no mention of any supply chain issues for the business or any resultant margin pressures. Meanwhile, the company’s rivals in this niche — Vestas (OTCMKTS:VWDRY) and Siemens Gamesa (OTCMKTS:GCTAF) — have downgraded guidance. That’s another boon for GE stock.

Bottom Line on GE Stock

When it comes down to it, the third quarter may become relatively bumpy for GE. However, most of the company’s issues are likely to resolve soon enough.

For instance, the hiccups with the company’s aviation and health care business appear temporary. Meanwhile, the power business appears to be trending in the right direction, while a PTC extension should ultimately bode well for the renewable energy segment as well.

All told, GE could raise its guidance and remain on track for medium-term goals. It’s currently having some difficulties, but that doesn’t mean you should count GE stock out moving forward.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.