Insights

Why General Electric Shares Fell Today

What happened

Shares of General Electric (NYSE: GE) fell by more than 4% in early trading today as investors continue to fret about growth prospects in the economy and, in particular, ongoing supply chain difficulties. While most stocks were weak today due to these issues, GE is particularly at risk because it’s preparing to initiate a breakup of the company with a spinoff of GE Healthcare in early 2023. 

So what

I’ve touched on this issue previously, but when companies are spun off they’re generally priced on the basis of enterprise value (market cap plus net debt) to earnings. If earnings (in this case GE Healthcare) are weak, then it will reduce the amount of debt that GE Healthcare can carry to ensure a smooth spinoff. 

Unfortunately, GE Healthcare was heavily hit by supply chain disruptions in the first quarter, and it’s hard to tell what the company will report for the second quarter. There will be pent-up demand for equipment installations and COVID-19 restrictions will likely have eased at healthcare facilities. However, supply chain constraints continue to impact the economy at large. 

Meanwhile, GE Renewable Energy and GE Aviation also face significant supply chain challenges, with Boeing‘s CEO recently talking of challenges among aviation suppliers.

Now what

Investors will have to wait and see what the company reports for its second quarter on July 26. There’s definitely pressure on its full-year guidance, but considering that the low end of GE’s free-cash-flow guidance stands at $5.5 billion and its market cap is just below $70 billion at the time of writing, any reiteration of guidance is likely to be a positive for the stock.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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