GE slide on track despite railway deal

GE slide on track despite railway deal

Shares in $133bn GE were anchoring the Dow Jones Industrial average on Wednesday, losing as much as 8%. The fall was partly in step with shares of other large U.S. multinationals as hopes for smooth progress in trade talks with China faded. Stocks reversed a firmer start to the week after U.S. President Trump noted the deal currently being discussed with the world’s second-largest economy would be “too hard to get done”.

There were, however, plenty of reasons for investors to remain wary of GE specific to the group alone. General Electric had been in the spotlight earlier in the week after announcing the $11.1bn merger of its transport manufacturing unit with Wabtec, a standalone maker of trains. The stock rose as much as 4% over two days in the wake of the news, but that barely scratched an around 50% decline since a peak in July 2016.

The group has been under pressure for years due to a reversal of cash flow growth. Falling revenues from power equipment and operations linked to the oil and gas industry are mostly to blame. Cash flow concerns have been somewhat alleviated by a $2.9bn cash component the deal will pay when completed, probably in 2019. But cash flow worries will remain elevated even after that payment, because GE’s leverage ratios will still be too high.

Gross debt at the end of 2017, totalling $134.6bn, was three times the level of Ebitda forecast for the current financial year. Total liabilities at the end of Q1 were 3.9 times the size of shareholder equity. Such obligations look dangerously above the group’s ability to meet them should earnings growth deteriorate further. True, the chances that GE will have to repay all debt quickly are slim. However, poor ratios get the thumbs down from investors and rating agencies because if not dealt with, they can increase financing costs and make the kind of root-and-branch revamp GE is undertaking more difficult.

GE’s CEO John Flannery is pushing ahead with a plan to make GE less complex, chiefly by jettisoning $20bn worth of assets within two years to focus on more productive businesses. Under current circumstances, it’s little surprise investors have signalled they believe a GE turnaround remains some way off.

Thoughts on GE’s technical price chart

• The stock was well contained by a steep declining channel in place since December 2016, implying an orderly slide in value that will be difficult to moderate or break out from, so long as both descending trend lines remains intact
• Another key motif was that the stock traded well below a major threshold used by investors to gauge underlying long-term prospects of an asset, the 200-week moving average. A reversion-to-the mean effect could be possible given the wide distance from current price to 200-week average. However, even if a reversion were seen, so long as the 200-week average overshadows price, sentiment on the share will remain dire
• At the time of writing, GE was struggling again with a momentous and historic support band ($14-$14.70) that had buoyed the stock during many -  but not all - challenges dating back to at least 2008
• The share broke sharply below the range in January 2009 and did not bottom until March of that year at $5.72. That move suggests GE could ultimately be headed to a price less than half current value, if the current test of $14-$14.70 fails.
• Resistance has recently been shown at $15.61, the 127.2% Fibonacci interval of the share’s rise between late-August 2015 and late July 2016
• Failure to get beyond $15.61 in the near term increases the risk of a breach of c. $14 support. If support breaks, the stock could extend its ongoing decline in volatile fashion