Summary
- GE's Q2 revenue fell hard, and its industrial businesses reported a segment loss.
- I estimate GE's debt is at junk status even after the potential sale of its BKR stake.
- Aviation was expected to be a moat. After reporting a segment loss in Q2, Aviation's outlook remains uncertain.
- GE's road to junk status is never-ending. Sell GE.
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Source: Financial Times
The coronavirus brought the global economy to a practical standstill and led to a spike in unemployment. However, financial markets have recovered from their lows shortly after the pandemic initially materialized. The Dow Jones (DIA) hovers around 27,000, and is practically Y/Y. Stimulus measures from policymakers have helped provide funds to millions of Americans displaced by shelter-in-place policies. Monetary policy has also kept financial markets afloat.
GE stock is down over 30% Y/Y, lagging broader markets. After hiving off attractive assets over the years, the company has few catalysts left. Airlines are in survival mode and have sharply reduced orders for the company's commercial aircraft engines. In Q2, GE's industrial operations reported revenue of $15.9 billion, down 25% Y/Y. Power, Renewable Energy, Aviation and Healthcare each reported revenue declines. Industrial reported a segment loss of $365 million, down from a segment profit of $2.3 billion in the year-earlier period.
Power is being disrupted by alternative energy, and management is exiting the coal power market. This came after making a large investment in coal with the acquisition of Alstom's power business a few years ago. Aviation, once a catalyst, experienced a $680 million segment loss. Its $58 billion backlog is in decline, and its headwinds could continue as Moody's does not expect passenger demand to recover for a few years. GE's industrial operations are cyclical in nature and could struggle after the pandemic subsides. Servicing debt with deteriorating assets could be challenging.
