According to several Wall Street firms, General Electric Co. (NYSE: GE) stock is poised for a significant remount this year. In fact, one analyst says it could rise over 50%.
However, they couldn't be more wrong. The company has a long way to go before it's a buy, and we've found an even better play in the industrials sector...
Over the last year, shares of General Electric Co. fell over 50% as news of the company's dire financial health spread across Wall Street. This news erased over $100 billion in the company's market value.
With the company's stock hovering around its 52-week low, many investors are wondering if it's a good time to buy General Electric stock.
According to General Electric CEO John Flannery, potential investors might want to hold off for the foreseeable future.
In a press conference in May, Flannery said GE's systemic issues aren't going away in the near future. "This is not going to be a quick fix... don't expect changes overnight," he said.
GE won't provide returns anytime soon. However, we've identified an industrial conglomerate that's in a perfect position to take up GE's slack.
It's an international brand that recently raised guidance and has the potential to jump over 25% in the next 12 months.
Before we get to our pick, here are the three key reasons why GE won't be providing a decent return for investors this year...
GE's Recovery Isn't All It's Cracked Up to Be
Three factors have put GE in financial straits.
GE made headlines last year when the company announced it was halving its dividend, cutting it from $0.24 to $0.12 in November 2017.
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This was largely due to issues with the company's slowing cash flow. Over the course of 2016 and 2017, GE's cash flow contracted to roughly $7 billion, about half of what it was before.
While cutting the company's dividend is expected to generate upward of $4 billion in cash annually, it's unlikely to help turn the company's fortunes around.
According to longtime GE analyst Jeffrey Sprauge, GE's cash flow has been unable to cover the company's dividend for at least the last five years, contributing to the company's debt.
In fact, nearly all of this dividend cut is designed to address GE's substantial debt. As of September 2017, the company owned nearly $77 billion in general debt.
But it gets even worse.
The $77 billion debt balance excludes an additional shortfall from GE Capital, a subsidiary of the General Electric parent brand. In January, GE announced the company owed $15 billion due to a long-term insurance program GE Capital invested in nearly two decades ago.
The company also announced plans to hold more than $15 billion over the next seven years in order to address the shortfall, starting with a reduction of $6.2 billion from the company's Q4 earnings, further hampering earnings growth and market performance.
Finally, GE is selling off assets at a record pace in an effort to address this debt. Last November, GE announced that the company would divest $20 billion in assets in order to reduce the company's leverage.
While this is a progressive move, it's likely to limit the company's ability to generate revenue for the foreseeable future. Liquidating company assets hurts the company's returns. This will weaken GE's cash flow and limit the company's ability to reel in its debt.
And it turns out the company's recent efforts may not be enough.
According to a report from JPMorgan Chase & Co., GE needs to pay of $30 billion of its debt to be considered an attractive investment. GE needs to free up several billion dollars to pay this off.
It's possible a leaner company could grow its way out of debt. That's why CEO Flannery has repeatedly said he's focused on profit channels that can generate "sustainable earnings growth" for GE.
However, judging by the company's reduced cash flow, massive debt, and continued downsizing, "sustainable earnings growth" could be years away.
As GE's woes continue to mount, we're looking at an industrial stock that is poised to take up GE's considerable slack.
A key member of the industrial goods sector, this stock has made considerable gains in the wake of GE's fall, rising 13% in the last year as GE sank over 50%.
This company beat earnings in 2017 and has repeatedly raised guidance for this year, indicating it's set for significant growth.
Here's our pick...
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Honeywell International Is Our Top Industrial Stock to Buy
Honeywell International Inc. (NYSE: HON) is an international industrial conglomerate that produces a wide range of consumer products, engineering services, and aerospace systems.
Honeywell's biggest strength is the company's ability to grow without spending too much in the process.
In fact, with a debit-to-equity ratio of 102, Honeywell is one of the lowest leveraged companies in the industrial manufacturing sector. For comparison, GE has a total debt/equity of 157, while industry titan Boeing Co. (NYSE: BA) sits at 959.
As a result, the company is unlikely to undergo the kind of financial turmoil that GE has run into as it expands.
This commitment to financial health is a defining factor of the company's bottom line. Over the last three years, Honeywell has increased its annual profits by over 9% while growing its operating costs by only 4%.
In addition, the company has used its excess profits to invest in cutting-edge cybersecurity technology. Honeywell's new security services keep companies' data safe. These services include automated patching, secure remote access, and firewall and intrusion detection capability.
In 2017, Honeywell acquired the security software company NextNine Ltd., suggesting that the company plans to continue its expansion into cybersecurity.
Considering that cybersecurity spending is expected to reach $1 trillion by 2021, this move by Honeywell is likely to create a windfall for shareholders.
Honeywell currently trades around $151. However, with the company's sound financial management and continuous expansion, analysts see Honeywell stock hitting $191 in the near future - a gain of 26%.
While Honeywell's profit potential is exciting, here's an even better opportunity...
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