GE - General Electric

[Parsad]

But I'm not against the model. It's just a tool. Some use it well, like BRK and CSU.to, and others use it terribly and just build empires with few synergies but many extra layers of fat and reduced speed and focus...

 

I think the founder / CEO's instilled culture is the key for any successful conglomerates, as evidenced by your examples. I don't know it very well, but I suppose GE under Jack Welch (and his culture) was in a much better shape than now.

I respectfully disagree. I see the current situation as the culmination/end result of a culture that Jack Welch put in place and then continued.

 

When you bill the company for your toilet paper and lightbulbs, that's a pretty f**ked up culture!  Immelt was the scape goat in this...Welch for all of his success was really the culprit.  Kind of like Sandy Weill back at Citigroup in it's heyday after the Traveller's acquisition.  Although Weill wasn't nearly as bad as Welch in terms of padding the personal coffer with entitlements.  Cheers!

[rishig]

I know little about the specifics of GE. Something always turned me off before I took a closer look... With that caveat, have they shown that the conglomerate format adds value to the company? Seems to me, not really. It would be interesting if they entirely split-off/spun-off the various divisions. There might be some really interesting assets (aero engines?) in there that I wouldn't touch if attached to the whole mess.

 

Liberty, you could get exposure to the jet engine business of GE via Safran (relatively more of a pure play in aero). GE's leadership in the jet engine space is in the narrow body segment is via its CFM engines. Every CFM engine is made by GE and Safran in partnership and the economics are probably equally good for both parties here.

[rb]

To add a couple of points:

 

Safran actually has a fairly large military and security business on top of CFM so it's not exactly a pure play.

 

While CFM is a superb business, GE's long haul aero business (while its not the leader) is sizeable as well. They have about 1/2 the market on 787 and will be exclusive on the new 777. They also have a chunk of the 787 market but that's not so significant.

 

 

[DTEJD1997]

But I'm not against the model. It's just a tool. Some use it well, like BRK and CSU.to, and others use it terribly and just build empires with few synergies but many extra layers of fat and reduced speed and focus...

 

I think the founder / CEO's instilled culture is the key for any successful conglomerates, as evidenced by your examples. I don't know it very well, but I suppose GE under Jack Welch (and his culture) was in a much better shape than now.

I respectfully disagree. I see the current situation as the culmination/end result of a culture that Jack Welch put in place and then continued.

 

When you bill the company for your toilet paper and lightbulbs, that's a pretty f**ked up culture!  Immelt was the scape goat in this...Welch for all of his success was really the culprit.  Kind of like Sandy Weill back at Citigroup in it's heyday after the Traveller's acquisition.  Although Weill wasn't nearly as bad as Welch in terms of padding the personal coffer with entitlements.  Cheers!

 

wut, Wut, WHUT????

 

Executives billing for toilet paper & lightbulbs?  They don't get paid enough?  I've never heard of such a thing....do you have an external link for this?

 

If this indeed genuine...I am going to think that there is some level of "silliness" going on. 

 

There was already the problem of a 2nd jet following around the CEO in case the 1st jet broke down by the side of the road.

 

Now there is toilet paper & lightbulb billing?

 

What else is going on?

[OracleofCarolina]

Sanjeev was alluding to the ridiculous perks Welch had in retirement. This all came out in one of his divorces..you can google and find pretty easily

[Guest Cameron]

Its even better when the company was cutting back on employees while at the same time giving the executives firing those employees when Welch took over millions in stock options, while fudging accounting numbers to please analysts. 

[Uccmal]

My view is this. GE finished the Jack Welch years as an extremely overvalued company. Welch took off and put his protegee in. The company was very focused on its stock price. Whenever a company is focused on its stock price it makes bad decisions. Instead of letting the market rerate the stock GE stated started engaging in financial engineering to prop up the stock. I don't want to say shenanigans because i don't think there was any fraud.

 

Years upon years of financial engineering have made the financials unreadable. When reading their AR it reminds me of Valeant. Lots of stuff in there but you don't really "get" anything. But again it's not a fair comparison. GE has real underlying businesses and they're mostly good. They also have new management now. It remains to be seen if the new CEO is serious about cleaning the company up or will turn back to the old tricks.

 

I worked at GE in the mid/late 90s at the end of the managed earnings era.  That is when I started investing so I followed it with interest but never bought the stock... Overvalued.  It was becoming common knowledge that they were engineering the earnings near the end of every quarter under Jack Welch using Ge Capital to get 1 cent per share above consensus.  They would 'move' inventory and sales between subs, suppliers and customers to get the end of quarter numbers they needed. 

Whether this was Jack Welch's doing or a response to the cultural imperative he had set up we will never know. 

 

It looks like Immelt tried to continue this practice up until the Financial crisis and has been in repair mode ever since.  The culture there was an abomination to human values, unless you valued work and money, at all costs.  IMO, this created a situation where you've run your car for too long without repairs and replacing parts and its just worn out. 

 

I dont know how anyone can value this.  I also dont know how anyone can step in and manage it. 

The mess has been decades in the making. 

 

Barge Pole Stock. 

[villainx]

My view is this. GE finished the Jack Welch years as an extremely overvalued company. Welch took off and put his protegee in. The company was very focused on its stock price. Whenever a company is focused on its stock price it makes bad decisions. Instead of letting the market rerate the stock GE stated started engaging in financial engineering to prop up the stock. I don't want to say shenanigans because i don't think there was any fraud.

 

Years upon years of financial engineering have made the financials unreadable. When reading their AR it reminds me of Valeant. Lots of stuff in there but you don't really "get" anything. But again it's not a fair comparison. GE has real underlying businesses and they're mostly good. They also have new management now. It remains to be seen if the new CEO is serious about cleaning the company up or will turn back to the old tricks.

 

I worked at GE in the mid/late 90s at the end of the managed earnings era.  That is when I started investing so I followed it with interest but never bought the stock... Overvalued.  It was becoming common knowledge that they were engineering the earnings near the end of every quarter under Jack Welch using Ge Capital to get 1 cent per share above consensus.  They would 'move' inventory and sales between subs, suppliers and customers to get the end of quarter numbers they needed. 

Whether this was Jack Welch's doing or a response to the cultural imperative he had set up we will never know. 

 

It looks like Immelt tried to continue this practice up until the Financial crisis and has been in repair mode ever since.  The culture there was an abomination to human values, unless you valued work and money, at all costs.  IMO, this created a situation where you've run your car for too long without repairs and replacing parts and its just worn out. 

 

I dont know how anyone can value this.  I also dont know how anyone can step in and manage it. 

The mess has been decades in the making. 

 

Barge Pole Stock.

 

I've read for awhile that Welch was not the genius/guru folks made him to be.  Even accepting that, Immelt was in charge long enough to right whatever perceived wrong.  Especially after the financial crisis, that was a hard reset. 

 

I'm just waiting for an analysis focused on the post crisis moves, and how it went from bad to bad.  There seem to be plenty of opportunity and time to right the course with proper management and strategy.

[Liberty]

I know little about the specifics of GE. Something always turned me off before I took a closer look... With that caveat, have they shown that the conglomerate format adds value to the company? Seems to me, not really. It would be interesting if they entirely split-off/spun-off the various divisions. There might be some really interesting assets (aero engines?) in there that I wouldn't touch if attached to the whole mess.

 

Liberty, you could get exposure to the jet engine business of GE via Safran (relatively more of a pure play in aero). GE's leadership in the jet engine space is in the narrow body segment is via its CFM engines. Every CFM engine is made by GE and Safran in partnership and the economics are probably equally good for both parties here.

 

Thanks for the suggestion, Rishi, I appreciate it.

[Cardboard]

"I've read for awhile that Welch was not the genius/guru folks made him to be."

 

I don't know all the details about the inner workings of GE but, it is undeniable that he turned around the company in the 80's. Moreover, his "tricks" on how to manage people are bang on. It may be tough to digest for the politically correct folks but, that is exactly how successful businesses manage their people.

 

Massaging the earnings was definitely wrong and Immelt definitely picked the torch at precisely the wrong moment or when the share price was at 40+ times earnings for such a large business with average growth prospects.

 

Cardboard

[Junto]

"I've read for awhile that Welch was not the genius/guru folks made him to be."

 

I don't know all the details about the inner workings of GE but, it is undeniable that he turned around the company in the 80's. Moreover, his "tricks" on how to manage people are bang on. It may be tough to digest for the politically correct folks but, that is exactly how successful businesses manage their people.

 

Massaging the earnings was definitely wrong and Immelt definitely picked the torch at precisely the wrong moment or when the share price was at 40+ times earnings for such a large business with average growth prospects.

 

Cardboard

 

Bill George has a nice post up on LinkedIn "GE’s Numbers May Recover, But It Has Already Lost Its Soul" https://www.linkedin.com/pulse/ges-numbers-may-recover-has-already-lost-its-soul-bill-george/?trackingId=HiOl0y5gXC9npMadJvQ%2BBA%3D%3D

 

[villainx]

"I've read for awhile that Welch was not the genius/guru folks made him to be."

 

I don't know all the details about the inner workings of GE but, it is undeniable that he turned around the company in the 80's. Moreover, his "tricks" on how to manage people are bang on. It may be tough to digest for the politically correct folks but, that is exactly how successful businesses manage their people.

 

Massaging the earnings was definitely wrong and Immelt definitely picked the torch at precisely the wrong moment or when the share price was at 40+ times earnings for such a large business with average growth prospects.

 

Cardboard

 

Bill George has a nice post up on LinkedIn "GE’s Numbers May Recover, But It Has Already Lost Its Soul" https://www.linkedin.com/pulse/ges-numbers-may-recover-has-already-lost-its-soul-bill-george/?trackingId=HiOl0y5gXC9npMadJvQ%2BBA%3D%3D

 

Thanks for the Bill George post.  I'm still left with the how/why the Immelt years went so terribly wrong. Or more specifically, how it could have been avoided and GE could overcome and continue to be a great company.  Immelt had all those pre 08 years to right whatever insider wrongs he would be privy to, and post 08, he had a free hand to shape the company the way he saw fit.  I'm not blaming Immelt, per se, as I'm sure there are excuses to go all around, but Immelt had two distinct chance to fix things, and thus far - nothing got fixed.

[rb]

I think the reason why the Imlet years went wrong is bad capital allocation and focus on stock price.

 

In my opinion there isn't much wrong with GE operationally. Their underlying businesses are good you just had bad decisions at headquarters. Here's some errors.

 

Spending money to aggressively move into oil and gas at the peak - value destruction. I think this was done to prop the stock. Position GE as a player in a hot industry - makes a good story for the stock.

 

Buying back a lot of overvalued stock - value destruction. Buying back lots of stock surely props its price but left the balance sheet a mess.

 

Not addressing GE's long standing pension hole. This ties in with the balance sheet mess. But addressing the pension deficit would have meant less money for buybacks so obviously they to ignore the pension problem.  ::)

 

Overspending at HQ. Some of the stories have been talked about here. Value destructive, but it sure helped make being a big shot executive fun.

 

GE's problem was that it was overvalued for a long time. Management made capital allocation mistakes in order to try and maintain that overvaluation. It may have been because they were greedy and wanted to be able to cash out their stock options (which wouldn't be worth much at a fair valuaion). It may have been because they were simply incompetent. In the end it doesn't matter much which one it was.

[Viking]

What do people think about GE trading at $18? Large enough margin of safety?

[dwy000]

I think the reason why the Imlet years went wrong is bad capital allocation and focus on stock price.

 

In my opinion there isn't much wrong with GE operationally. Their underlying businesses are good you just had bad decisions at headquarters. Here's some errors.

 

Spending money to aggressively move into oil and gas at the peak - value destruction. I think this was done to prop the stock. Position GE as a player in a hot industry - makes a good story for the stock.

 

Buying back a lot of overvalued stock - value destruction. Buying back lots of stock surely props its price but left the balance sheet a mess.

 

Not addressing GE's long standing pension hole. This ties in with the balance sheet mess. But addressing the pension deficit would have meant less money for buybacks so obviously they to ignore the pension problem.  ::)

 

Overspending at HQ. Some of the stories have been talked about here. Value destructive, but it sure helped make being a big shot executive fun.

 

GE's problem was that it was overvalued for a long time. Management made capital allocation mistakes in order to try and maintain that overvaluation. It may have been because they were greedy and wanted to be able to cash out their stock options (which wouldn't be worth much at a fair valuaion). It may have been because they were simply incompetent. In the end it doesn't matter much which one it was.

 

There were certainly a lot of mistakes made in capital allocation (and other things) but I'm not sure on the ones listed here.

 

Baker Hughes was announced in 2016 which was probably closer to a trough for oil and gas than a peak and gave scale to.compete with Sclumberger.  I think the bigger mistake was Alstom.  Doubling down on a market with negative growth and overpaying while agreeing to silly terms to appease French government was just dumb.

 

The stock buyback was a necessity.  When they got out of capital there was no choice but to buy back stock because they no longer had the income stream to support the dividend on the outstanding shares.  True they can't afford the dividend now but imagine the cash needed if they still had those other shares outstanding.  At least they didn't waste it on another Alstom like acquisition which would have been even worse.

 

Agree that the remaining businesses are fairly good although very low growth (not convinced Power is good but nothing you can do with it -- can't sell it or spin it off).  Heres hoping they can cut overhead and get back to growth at some point.  its hard to see meaningful downside from $17 but also hard to see much upside until 2019 be omes clearer.

[DTEJD1997]

What do people think about GE trading at $18? Large enough margin of safety?

 

The more I hear & read about GE, the more I think there is still a potential for a "black swan" event.  Getting kicked out of the Dow 30, newly found financial goofiness, another dividend cut, boneheaded asset disposition, pension problems, who knows?  There is plethora of "bad things", I am going to suggest that there might be even more that the public does not know about.

 

If GE is booted from the Dow 30, how many shares will have to be sold as mandatory re-positioning for funds?  How many individuals will  sell?

 

What if the general market has a 10-15% downturn?  What will happen to GE's pension?  I imagine it will be MASSIVELY underfunded...

 

What is the risk to reward ratio at this point?  I am going to guess that there is still a substantial amount of risk...what is the upside?  Is GE going to 30 in the near future?

 

Finally, with such incredible bargains in today's market, why even goof around with GE?

 

[Spekulatius]

I think the reason why the Imlet years went wrong is bad capital allocation and focus on stock price.

 

In my opinion there isn't much wrong with GE operationally. Their underlying businesses are good you just had bad decisions at headquarters. Here's some errors.

 

Spending money to aggressively move into oil and gas at the peak - value destruction. I think this was done to prop the stock. Position GE as a player in a hot industry - makes a good story for the stock.

 

Buying back a lot of overvalued stock - value destruction. Buying back lots of stock surely props its price but left the balance sheet a mess.

 

Not addressing GE's long standing pension hole. This ties in with the balance sheet mess. But addressing the pension deficit would have meant less money for buybacks so obviously they to ignore the pension problem.  ::)

 

Overspending at HQ. Some of the stories have been talked about here. Value destructive, but it sure helped make being a big shot executive fun.

 

GE's problem was that it was overvalued for a long time. Management made capital allocation mistakes in order to try and maintain that overvaluation. It may have been because they were greedy and wanted to be able to cash out their stock options (which wouldn't be worth much at a fair valuaion). It may have been because they were simply incompetent. In the end it doesn't matter much which one it was.

 

I agree with all the above. I think getting a better capital allocator will go a long way. They still have business that they are number #1 and #2 in Aviation (#1), Power (#1), healthcare (probably #2,ish), locomotives (#1)., Energy is #3, but has a strong balance sheet and probably could match Halliburton as a #2 as well, but it is probably a business that GE should get out of, lighting is a lost cause and needs to be sold.

 

Power and Aviation have a lot of basic technology in common, since power plant turbines and aircraft engines are similar in technology. Healthcare is fine as is, but they is probably a business they GE should have strengthened rather than Energy.

 

I don’t think that losing its soul is the issue, GE probably lost its solid under Welch when he created a conglomerate.

[rb]

There were certainly a lot of mistakes made in capital allocation (and other things) but I'm not sure on the ones listed here.

 

Baker Hughes was announced in 2016 which was probably closer to a trough for oil and gas than a peak and gave scale to.compete with Sclumberger.  I think the bigger mistake was Alstom.  Doubling down on a market with negative growth and overpaying while agreeing to silly terms to appease French government was just dumb.

 

The stock buyback was a necessity.  When they got out of capital there was no choice but to buy back stock because they no longer had the income stream to support the dividend on the outstanding shares.  True they can't afford the dividend now but imagine the cash needed if they still had those other shares outstanding.  At least they didn't waste it on another Alstom like acquisition which would have been even worse.

 

Agree that the remaining businesses are fairly good although very low growth (not convinced Power is good but nothing you can do with it -- can't sell it or spin it off).  Heres hoping they can cut overhead and get back to growth at some point.  its hard to see meaningful downside from $17 but also hard to see much upside until 2019 be omes clearer.

The idea that you have to blow money on a buyback because you can't afford the dividend is ridiculous. If you can't afford the dividend, cut it. They could have done a lot of stuff that was value neutral. For example cut the dividend and at the same time issue a special dividend with proceeds from sale of Capital. Buying back stock at inflated prices is possible the worst thing they could have done. They effectively made remaining shareholders pay departing shareholders a bonus to leave.

 

Overpaying for Alstom is a minor mistake compared to the buyback and at least they got Alstom. With the buyback they blew up value that's close to the equivalent of the Health Care division (or a few Alstoms). How long did it take to build the Health Care division? All that value .... poof... gone in few years with a bad decision.

[dwy000]

There were certainly a lot of mistakes made in capital allocation (and other things) but I'm not sure on the ones listed here.

 

Baker Hughes was announced in 2016 which was probably closer to a trough for oil and gas than a peak and gave scale to.compete with Sclumberger.  I think the bigger mistake was Alstom.  Doubling down on a market with negative growth and overpaying while agreeing to silly terms to appease French government was just dumb.

 

The stock buyback was a necessity.  When they got out of capital there was no choice but to buy back stock because they no longer had the income stream to support the dividend on the outstanding shares.  True they can't afford the dividend now but imagine the cash needed if they still had those other shares outstanding.  At least they didn't waste it on another Alstom like acquisition which would have been even worse.

 

Agree that the remaining businesses are fairly good although very low growth (not convinced Power is good but nothing you can do with it -- can't sell it or spin it off).  Heres hoping they can cut overhead and get back to growth at some point.  its hard to see meaningful downside from $17 but also hard to see much upside until 2019 be omes clearer.

The idea that you have to blow money on a buyback because you can't afford the dividend is ridiculous. If you can't afford the dividend, cut it. They could have done a lot of stuff that was value neutral. For example cut the dividend and at the same time issue a special dividend with proceeds from sale of Capital. Buying back stock at inflated prices is possible the worst thing they could have done. They effectively made remaining shareholders pay departing shareholders a bonus to leave.

 

Overpaying for Alstom is a minor mistake compared to the buyback and at least they got Alstom. With the buyback they blew up value that's close to the equivalent of the Health Care division (or a few Alstoms). How long did it take to build the Health Care division? All that value .... poof... gone in few years with a bad decision.

 

While the repurchase of stock at high prices is foolish in retrospect, unless they were going to redeploy the proceeds to a higher returning asset the concept was right because the after-tax cash cost of equity for GE was probably higher than debt.  The sale of Capital was a one off event that eliminated a cash generative business and returned the deployed cash to GE.  Unless the cash was going to be deployed into another cash generating asset it was a drag on cash and returning it to shareholders is what you hope management does with returned capital.  Cutting the dividend sooner of course should have been done.  But that decision is independent of the sale of GE Capital.  The businesses right now cant cover the dividend even after buying back stock so shame on management for not cutting it sooner.  I would hope that if they knew they would eventually cut the dividend they would have held the cash and waited for the stock to drop from that announcement.  I'm guessing they thought they could keep the dividend at the time they bought back the stock.

 

Doubling down on a shrinking Power business with Alstom was a huge mistake.  That was the largest industrial acquisition in history and the cost was more than the HC division is worth.  The Power business is where almost all the problems are right now.

[Spekulatius]

GE paid $13B for Alsthom. While it may have been a mistake, with  GE’s market ca is $200+ then, it wasn’t really a major one. I do think that GE got a decent business as well, even though the power business subsequently got into a downturn. The healthcare business is generating $3.2B in pretax profits this year, so I think it is worth at least $40B and that is much more than what they paid for Alsthom for.

[villainx]

GE paid $13B for Alsthom. While it may have been a mistake, with  GE’s market ca is $200+ then, it wasn’t really a major one. I do think that GE got a decent business as well, even though the power business subsequently got into a downturn. The healthcare business is generating $3.2B in pretax profits this year, so I think it is worth at least $40B and that is much more than what they paid for Alsthom for.

 

 

A more exhaustive article or case study really needed to be done on Immelt year GE.  Dividend being a problem could be atleast be forecasted somewhat, so they could have simply slowed the raise rate.  Alstrom, Synchrony, oil and gas add ons, the alternative purchases not made, it's just frustrating for shareholders when there was so many years of not learning or adjusting - even while other industrials found better strategies. As well as highlighting the good moves too. 

[Txvestor]

Why? When the idiot board paid him a prince's ransom for services rendered!

Worse yet, the new CEO defends the chairman of said board, gave no reasonable explanation of what happened and says he wants to look forward not backward. What could go wrong with such leadership? IMHO GE has a culture and accountability problem, and these are not easy to fix, especially when the leadership is obviously a big part of the problem. This is likely a mediocre investment at best for the next decade plus. We may get a small bounce off an oversold low but that will be no sign of a recovery or longer term investment.

[gfp]

Tisch has started buying through Loews Corp - $53 million this filing, appears to be first purchases at Lowes but he is a director at GE.

 

https://www.sec.gov/Archives/edgar/data/40545/000123120517000140/xslF345X03/edgar.xml

[longlake95]

anyone getting more interested now, under $16? - a 5% FCF yield (if you believe management's guidance)...there's lots of chatter about a new CEO, CFO and Chairman. Flannery has been with GE since 1987 - is he really programmed/willing to do something different to right the ship?

[nkp007]

GE's worth is based on so many estimates (from revenue estimates from long-term service contracts to homecare insurance liabilities) that it's difficult for me to get comfortable at the current price, especially given that management's estimates have been so off.