GE - General Electric

[rb]

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?

I would buy it at this price. i think it's somewhere in the undervalued range. Am I buying it? Not yet. It's hard for me to pull the trigger if I don't understand the financials even if I'm pretty sure it's undervalued. If Berkshire were to take a 1 billion + stake then I'd happily buy it.

 

As for righting the ship, there's not that much to do they need to stop playing accounting/financial games and trim some costs at HQ i.e. fire the executive vice president of looking and sounding important. That's not very hard to do.

[Txvestor]

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?

I would buy it at this price. i think it's somewhere in the undervalued range. Am I buying it? Not yet. It's hard for me to pull the trigger if I don't understand the financials even if I'm pretty sure it's undervalued. If Berkshire were to take a 1 billion + stake then I'd happily buy it.

 

As for righting the ship, there's not that much to do they need to stop playing accounting/financial games and trim some costs at HQ i.e. fire the executive vice president of looking and sounding important. That's not very hard to do.

 

Its actually pretty hard to do whennthe culture is so screwed up. Not a good long term investment in my opinion. Perhaps one can play if for a bounce, but its hard to time that, as the long term care underwriting losses showed, noone knows the depth of the well here.

[TwoCitiesCapital]

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?

 

Is that considering the $30B in pension liabilities that remains unfunded (i.e. borrowed). Sure, rising rates will help cut this figure, but the REAL figure is likely to be larger than $30B if we used realistic forward looking returns.

 

Once I adjust for the pension liabilities, the trailing EBIT/EV doesn't really do much for me even at $15 per share.

 

I mean, didn't they spend roughly $30 billion alone repurchasing shares in 2016? And those shares are worth what....$15B now? $15 billion in value just vaporized along with the billions lost to long-term care policies?!?!?! Wwhile the $30B pension liability still sits there and costs them money in the form of opportunity cost and PBGC premiums?!?!?!?!

 

I know that one-year is a very short litmus test, but this seems to be a clear mismanagement resources. After a tens of billions in value vaporization in the face of the highest pension liability in the S&P 500, shareholders are right to take a wait and see approach.

 

Drop it to $10-12, or put 5% on the 30-year treasury to cut the pension liability, and I'll start being interested in investing in this dog - otherwise, I'm with the rest of shareholders and sitting on the sidelines waiting for a real opportunity.

[fareastwarriors]

I might be interested in the low teens. There are still many unknown unknowns.

[rb]

Look, it's easy to be indignant at GE. They were arrogant and they made mistakes. The buybacks were stupid. And yes the, pension liability is deplorable - see arrogance.

 

At the same time the price is down 50%. Also GE is made up of a bunch of very good businesses. Aviation is an unbelievably good business. Power is also a great business - they've just hit a cycle. Healthcare is ok but could be better. I don't really know why oil and gas is there.

 

I also don't agree with the divestitures of the small businesses but maybe they get good prices for those at this time. A good way to raise capital is also cutting dividend to zero.

[fareastwarriors]

How GE Went From American Icon to Astonishing Mess

 

Famous for great management, General Electric is staring down a plunging share price, a federal investigation, and possible breakup.

 

https://www.bloomberg.com/news/features/2018-02-01/how-ge-went-from-american-icon-to-astonishing-mess

[walkie518]

It's hard to value a company that doesn't report transparent segment information but has so many segments.

 

My thinking is that the recent quarter shows good segments paying for the bad segments and whatever waste remains in the company on the consolidated statements.  In the segments, one forgets about the costs of running this business. 

 

This likely gets interesting around $14/sh.  They should've gotten rid of the dividend.  Cutting it was silly when cash flow hardly supports and now they'll bleed what they have enough under the hood to turn the corner.

[TwoCitiesCapital]

Look, it's easy to be indignant at GE. They were arrogant and they made mistakes. The buybacks were stupid. And yes the, pension liability is deplorable - see arrogance.

 

At the same time the price is down 50%. Also GE is made up of a bunch of very good businesses. Aviation is an unbelievably good business. Power is also a great business - they've just hit a cycle. Healthcare is ok but could be better. I don't really know why oil and gas is there.

ive

I also don't agree with the divestitures of the small businesses but maybe they get good prices for those at this time. A good way to raise capital is also cutting dividend to zero.

 

Yes, the price is down 50%. And their liabilities have GROWN. I'm a value investor - I lick my lips and falling stock prices. But falling stock prices on heavily levered companies simply means they have less flexibility to deal with that leverage - particularly if there is little reason to believe the short-to-intermediate outlook is improving. When at one time the company could have issued debt and shares to reduce/push out liabilities, now they cannot. Incremental cash flows will go to pension holders - not shareholders. The price is accurately discounting the less attractive risk/reward proposition for shareholders.

 

The best GE can hope for is that the 30-year goes to 5% and slashes their pension liability. If it goes to 2% instead, they're in for a hell of a run.

 

 

[Txvestor]

Look, it's easy to be indignant at GE. They were arrogant and they made mistakes. The buybacks were stupid. And yes the, pension liability is deplorable - see arrogance.

 

At the same time the price is down 50%. Also GE is made up of a bunch of very good businesses. Aviation is an unbelievably good business. Power is also a great business - they've just hit a cycle. Healthcare is ok but could be better. I don't really know why oil and gas is there.

 

I also don't agree with the divestitures of the small businesses but maybe they get good prices for those at this time. A good way to raise capital is also cutting dividend to zero.

 

Let me take your points one by one:

Yes it is important to analyze, but after you have done the analysis why not indignant? Let me take a stab at indignant. 

I think they are one hot mess and that is why I took the painful decision to exit my 2% position at $17-18. My only regret being I was not sufficiently decisive in doing it in the low 20s when I first considered it. Yet the facts were also not as out in the open then, because management was not transparent, may still not be who knows. They are 50% down because it is entirely justifiable. They also do not have a near term solution for a quick turnaround. You are basically betting on a 5+ year horizon of steady growth once they right their ship, and even with that, it is not clear to me they can be a double. There are better investment options that have less question over leadership than GE.

 

You mention aviation. Mr East at Rolls Royce holdings is a far more credible manager with an engineering background and with a better track record than Flannery. I find it easier to trust him. Rolls is a pure play aviation business in a country with a devalued currency whose gov't owns a golden share and will almost never let that company go under. Their turnaround is a far more beleivable story. They share a near duopoly in wide body jet Engines with GE. If you want to invest in aviation, invest in Rolls!

 

The healthcare sector is currently on a value based purchasing system footing. If nothing else the JPM BRKB AMZN effort should demonstrate the impatience of american industry to accelerate decreased utilization and that means less machines and scanners etc. There are countervailing forces, like ageing populations, increased consumer expectations etc. however I am not convinced that the market is going to be as robust as years past. They also face serious competition in that space with Japanese and European competitors. These trends also seems likely to last atleast for the next few years.

 

Oil and gas is there because GE made a retarded move to buy it at the peak of the cycle. Same board and Flannery were a part of the executive circle. We do not know the internal dynamics of that decision, but quite clearly hindsight confirms to us that it was a highly retarded one. All I know is that I will not give the current leadership a total pass on it. Their locomotive business is another dinosaur dumped on them at a rather high price. Add to that their pension liabilities and their as yet unquantifiable LTC liabilities and current balance sheet that forced them to cut a shareholder base cherished dividend in half, and you quite quickly realize that they do not have a ton of money to invest in growth either.

The credibility of management is toast. Even the new ones. The bad news did not even coming out all at once, it is coming out in dribs and drabs, makes you wonder if management even fully has a handle on the entire operation. Considering Flannery spent his first 20yrs at GE in GE capital and oversaw the post GFC divestitures of GE capital, he sure kept some gems in the LTC insurance liabilities didn't he?

The organizational culture seems shot. Which bright young talent would in their right mind, given a  chance want to go work for an employer like this? There is no glamor, there is no direction, no money to invest, always looking to cut costs, it has the feel of going to work for Sears, where the only Q is when does my company finally die. Its like a sick dog with fleas and ticks! I would be surprised if this thing saw 20s by the 2020s. I doubt it goes under either, but it will likely be nearer to dead money than a good recovery story. Money is best cycled elsewhere.

 

 

 

 

[arcube]

Look, it's easy to be indignant at GE. They were arrogant and they made mistakes. The buybacks were stupid. And yes the, pension liability is deplorable - see arrogance.

 

At the same time the price is down 50%. Also GE is made up of a bunch of very good businesses. Aviation is an unbelievably good business. Power is also a great business - they've just hit a cycle. Healthcare is ok but could be better. I don't really know why oil and gas is there.

 

I also don't agree with the divestitures of the small businesses but maybe they get good prices for those at this time. A good way to raise capital is also cutting dividend to zero.

 

Let me take your points one by one:

Yes it is important to analyze, but after you have done the analysis why not indignant? Let me take a stab at indignant. 

I think they are one hot mess and that is why I took the painful decision to exit my 2% position at $17-18. My only regret being I was not sufficiently decisive in doing it in the low 20s when I first considered it. Yet the facts were also not as out in the open then, because management was not transparent, may still not be who knows. They are 50% down because it is entirely justifiable. They also do not have a near term solution for a quick turnaround. You are basically betting on a 5+ year horizon of steady growth once they right their ship, and even with that, it is not clear to me they can be a double. There are better investment options that have less question over leadership than GE.

 

You mention aviation. Mr East at Rolls Royce holdings is a far more credible manager with an engineering background and with a better track record than Flannery. I find it easier to trust him. Rolls is a pure play aviation business in a country with a devalued currency whose gov't owns a golden share and will almost never let that company go under. Their turnaround is a far more beleivable story. They share a near duopoly in wide body jet Engines with GE. If you want to invest in aviation, invest in Rolls!

 

The healthcare sector is currently on a value based purchasing system footing. If nothing else the JPM BRKB AMZN effort should demonstrate the impatience of american industry to accelerate decreased utilization and that means less machines and scanners etc. There are countervailing forces, like ageing populations, increased consumer expectations etc. however I am not convinced that the market is going to be as robust as years past. They also face serious competition in that space with Japanese and European competitors. These trends also seems likely to last atleast for the next few years.

 

Oil and gas is there because GE made a retarded move to buy it at the peak of the cycle. Same board and Flannery were a part of the executive circle. We do not know the internal dynamics of that decision, but quite clearly hindsight confirms to us that it was a highly retarded one. All I know is that I will not give the current leadership a total pass on it. Their locomotive business is another dinosaur dumped on them at a rather high price. Add to that their pension liabilities and their as yet unquantifiable LTC liabilities and current balance sheet that forced them to cut a shareholder base cherished dividend in half, and you quite quickly realize that they do not have a ton of money to invest in growth either.

The credibility of management is toast. Even the new ones. The bad news did not even coming out all at once, it is coming out in dribs and drabs, makes you wonder if management even fully has a handle on the entire operation. Considering Flannery spent his first 20yrs at GE at GE capital and oversaw the post GFC divestitures in GE capital, he sure kept some gems in the LTC insurance liabilities didn't he?

The organizational culture seems shot. Which bright young talent would in their right mind, given a  chance want to go work for an employer like this? There is no glamor, there is no direction, no money to invest, always looking to cut costs, it has the feel of going to work for Sears, where the only Q is when does my comlany die. Its like a sick dog with fleas and ticks! I would be surprised if this thing saw 20s by the 2020s. Money is best cycled elsewhere.

+ 1. Thank you.

[rb]

Look, it's easy to be indignant at GE. They were arrogant and they made mistakes. The buybacks were stupid. And yes the, pension liability is deplorable - see arrogance.

 

At the same time the price is down 50%. Also GE is made up of a bunch of very good businesses. Aviation is an unbelievably good business. Power is also a great business - they've just hit a cycle. Healthcare is ok but could be better. I don't really know why oil and gas is there.

 

I also don't agree with the divestitures of the small businesses but maybe they get good prices for those at this time. A good way to raise capital is also cutting dividend to zero.

 

Let me take your points one by one:

Yes it is important to analyze, but after you have done the analysis why not indignant? Let me take a stab at indignant. 

I think they are one hot mess and that is why I took the painful decision to exit my 2% position at $17-18. My only regret being I was not sufficiently decisive in doing it in the low 20s when I first considered it. Yet the facts were also not as out in the open then, because management was not transparent, may still not be who knows. They are 50% down because it is entirely justifiable. They also do not have a near term solution for a quick turnaround. You are basically betting on a 5+ year horizon of steady growth once they right their ship, and even with that, it is not clear to me they can be a double. There are better investment options that have less question over leadership than GE.

 

You mention aviation. Mr East at Rolls Royce holdings is a far more credible manager with an engineering background and with a better track record than Flannery. I find it easier to trust him. Rolls is a pure play aviation business in a country with a devalued currency whose gov't owns a golden share and will almost never let that company go under. Their turnaround is a far more beleivable story. They share a near duopoly in wide body jet Engines with GE. If you want to invest in aviation, invest in Rolls!

 

The healthcare sector is currently on a value based purchasing system footing. If nothing else the JPM BRKB AMZN effort should demonstrate the impatience of american industry to accelerate decreased utilization and that means less machines and scanners etc. There are countervailing forces, like ageing populations, increased consumer expectations etc. however I am not convinced that the market is going to be as robust as years past. They also face serious competition in that space with Japanese and European competitors. These trends also seems likely to last atleast for the next few years.

 

Oil and gas is there because GE made a retarded move to buy it at the peak of the cycle. Same board and Flannery were a part of the executive circle. We do not know the internal dynamics of that decision, but quite clearly hindsight confirms to us that it was a highly retarded one. All I know is that I will not give the current leadership a total pass on it. Their locomotive business is another dinosaur dumped on them at a rather high price. Add to that their pension liabilities and their as yet unquantifiable LTC liabilities and current balance sheet that forced them to cut a shareholder base cherished dividend in half, and you quite quickly realize that they do not have a ton of money to invest in growth either.

The credibility of management is toast. Even the new ones. The bad news did not even coming out all at once, it is coming out in dribs and drabs, makes you wonder if management even fully has a handle on the entire operation. Considering Flannery spent his first 20yrs at GE in GE capital and oversaw the post GFC divestitures of GE capital, he sure kept some gems in the LTC insurance liabilities didn't he?

The organizational culture seems shot. Which bright young talent would in their right mind, given a  chance want to go work for an employer like this? There is no glamor, there is no direction, no money to invest, always looking to cut costs, it has the feel of going to work for Sears, where the only Q is when does my company finally die. Its like a sick dog with fleas and ticks! I would be surprised if this thing saw 20s by the 2020s. I doubt it does under either, but it will likely be nearer to dead money than a good recovery story. Money is best cycled elsewhere.

Ok well you really didn't take down my points. All you did is complain about the stock price going down, their liabilities, that management made boneheaded moves at HQ, that they've been dishonest. All of that I've acknowledged in my original post.

 

Maybe I wasn't clear. So let me elaborate a bit. We're all on the same page that at HQ they've been boneheads. But there's a difference between a company that's total crap like let's say Valeant and GE. Valeant there's you can't fix because the whole business was crooked. Now let's look at the GE business. Take aviation. Is that a crap business? Are their engines crap? No, they're really good. Is it an inefficient business? Absolutely not! It's very efficient. Much better than Rolls Royce - which I own by the way. Ok, so nothing wrong with aviation.

 

How about power? Is there anything wrong with their turbines? Nope. Is the business inefficient? Nope. Ok, no problem with Power either.

 

I was never too enamored with the healthcare division. It under-performed healthcare benchmarks but it doesn't make the sort of high growths stuff in healthcare. They're products are solid though. Again the problem with GE healthcare was excessive expectations.

 

I agree that oil and gas was a monstrosity created by boneheaded and deal happy management.

 

But once you take a step back and take you look at it what you see is a collection of really good businesses with a rather large pension liability.

 

Here are the problems at GE:

 

1. It was never a $30 a share company.

2. Management wanted it to be a $30 a share company.

 

Here's how you solve the problems at GE:

1. Cut out the dividend for a few years

2. Send senior management on an all expenses paid golf trip for a couple of years.

 

There are some companies that are rotten through and through. That's Valeant. Then there are some companies that have some rot on the surface that makes it look ugly but once you cop that you have a nice and juicy fruit. That's GE.

[Txvestor]

Well good luck with that my friend.

You make no coherent argument about why their so called gems of well managed businesses will grow moving forward. You acknowlege that management has been value destructive but present no explanation for why that will change.

I have no way to quantify their pension liabilities and LTC insurance losses. If you do, more power to you. All I know is they have kept erring on the side of underestimating those.

As to your assertion about their businesses, that was part of the thesis for decades. It was the case when the stock was in the 50s, same when it was in the 30s and the same now that it is at 15. Yet all along they managed to destroy value. Look, I am not going to go out and short the stock as Valeant was crying out for, but I am not convinced that it corrects higher or becomes a great growth story from here either. I am also not sure why you say you are invested in Rolls when you believe GE is a superior business, care to elaborate?

So realistically nothing about the business quality has overwhelmed management idiocy for a 15yr period. Not a small statement. That is not an opinion, it is there in black and white.

Here is the issue with your suggestions. Divi elimination is not happening due to the shareholder base, one that prioritize income over growth. And good luck ridding the company of entrenched management and board, with their deluded view of value creation. Nelson Peltz sure has picked some tough targets of late.

GE has both warts on the outside as well as organizational issues that overwhelm the few decent businesses they have. Once again, I think capital best deployed elsewhere.

 

[ICUMD]

Maybe it has to do with the fall of Edison and the rise of Tesla?  ::)

[DTEJD1997]

Hey all:

 

I don't see how GE is anything OTHER than highly speculative...

 

A cursory glance shows their debt levels at somewhere around $135BB.  Contrast that to SALES of about $121BB.

 

I don't think that debt level is accounting for pension obligations.

 

Management is going to pay a dividend of some level under almost any circumstance.  Even if the dividend were eliminated OR reduced to $.01/share, it would take YEARS of paying down the debt to get the company to a more reasonable level.

 

Then you've got stories of the empty jet following around the CEO in case the primary jet broke down by the side of the road.  How many other incredibly stupid & wasteful things are they doing?

 

With the amount of financial leverage GE has, there is no room for error.  Do you think GE's management is of that quality?

[no_free_lunch]

I agree with you 100%. 

 

Just ballparking, roughly $20B EBITDA.  Something like $105B net debt (including pension obligations) + $135B market cap = $240B EV.  So EV / EBITDA of 12x?  I think I am light on the debt levels too.  I just don't see it being cheap at a high level, doesn't seem worth digging into.

[Spekulatius]

I agree with you 100%. 

 

Just ballparking, roughly $20B EBITDA.  Something like $105B net debt (including pension obligations) + $135B market cap = $240B EV.  So EV / EBITDA of 12x?  I think I am light on the debt levels too.  I just don't see it being cheap at a high level, doesn't seem worth digging into.

 

Well, much of the debt are liabilities from GE financial. The debt levels aren’t really that high. It’s should be valued on the basis of Its SOP and ai think that value is north of $20/share.

[DTEJD1997]

I agree with you 100%. 

 

Just ballparking, roughly $20B EBITDA.  Something like $105B net debt (including pension obligations) + $135B market cap = $240B EV.  So EV / EBITDA of 12x?  I think I am light on the debt levels too.  I just don't see it being cheap at a high level, doesn't seem worth digging into.

 

Well, much of the debt are liabilities from GE financial. The debt levels aren’t really that high. It’s should be valued on the basis of Its SOP and ai think that value is north of $20/share.

 

OK:

 

Assume that most of the debt is related/in GE financial...and that GE Financial has good assets to offset the debts.  So much so that it cancels each other out.  Thus, GE is not as heavily levered as I initially thought it to be...

 

Book value is still a bit above $7/share ($7.41).  What type of ROE will GE be able to make on that book?  15%?  I would argue that might be unrealistically optimistic at this point in time...but let us use that for discussion sake.  That would get you earnings of about $1.05/share.

 

Looking at analysts estimates for next year, they are coming in at a range of $.85 to $1.15/share.  A P/E of something like 18.4 to 13.6.  In all but the most optimistic analysts opinion, the stock looks fully valued on next years earnings.  That is at/near a 52 week low.

 

In recent memory, GE has tended to surprise on the DOWNSIDE.  Their corporate culture is unquestionably WORSE now than what it was in the past. So I would argue that it is more likely than not to surprise to the downside or to have operational problems.

 

Then you've got the pension problems.  Recently, with a broadly rising market, this may be somewhat less than what it was even a year ago.

 

Of course, I am a hard core value investor, and think that paying a P/E of double digits is "crazy".  My expectations for valuation are frequently out of whack with what the market thinks is good/acceptable.

[Spekulatius]

I agree with you 100%. 

 

Just ballparking, roughly $20B EBITDA.  Something like $105B net debt (including pension obligations) + $135B market cap = $240B EV.  So EV / EBITDA of 12x?  I think I am light on the debt levels too.  I just don't see it being cheap at a high level, doesn't seem worth digging into.

 

Well, much of the debt are liabilities from GE financial. The debt levels aren’t really that high. It’s should be valued on the basis of Its SOP and ai think that value is north of $20/share.

 

OK:

 

Assume that most of the debt is related/in GE financial...and that GE Financial has good assets to offset the debts.  So much so that it cancels each other out.  Thus, GE is not as heavily levered as I initially thought it to be...

 

Book value is still a bit above $7/share ($7.41).  What type of ROE will GE be able to make on that book?  15%?  I would argue that might be unrealistically optimistic at this point in time...but let us use that for discussion sake.  That would get you earnings of about $1.05/share.

 

Looking at analysts estimates for next year, they are coming in at a range of $.85 to $1.15/share.  A P/E of something like 18.4 to 13.6.  In all but the most optimistic analysts opinion, the stock looks fully valued on next years earnings.  That is at/near a 52 week low.

 

In recent memory, GE has tended to surprise on the DOWNSIDE.  Their corporate culture is unquestionably WORSE now than what it was in the past. So I would argue that it is more likely than not to surprise to the downside or to have operational problems.

 

Then you've got the pension problems.  Recently, with a broadly rising market, this may be somewhat less than what it was even a year ago.

 

Of course, I am a hard core value investor, and think that paying a P/E of double digits is "crazy".  My expectations for valuation are frequently out of whack with what the market thinks is good/acceptable.

 

I don’t think the ROE on a book value is a realistic way to estimate GE’s earnings power. I think a SOP analysis is better be sure GE is currently underesrming in several segments ( Energy, Finance, Trubines .)

 

GE finance has $35 in equity and $150B in assets, so that is where most of the debt is coming from. I am not sure what it is worth after the rece;toy announced shortfall in insurance reserves, probably less than book value.

 

GE energy is currently roughly breakevem, but the valuation of GE’s  BGHE stake implies. $20B valuation. BHGE has a good balance sheet, FWIW.

 

Then there is the aircraft turbine crown yewel, the infrastructure business and GE health care, which are good business, deserving a decent multiple, minus the pension liabilities (which should be smaller now than $30B, because the interest rates rise) and the bloated corporate overhead.

 

It’s not a Valiant, where the whole business is broken and there are boatloads of debt. GE has debt, but it is manageable. I think they need to restructure the company, cut overhead cost, deal with the pension and insurance reserve shortfall and further reduce GE capital to the parts that are attached to existing business, sell GE finance or Spin it off ( they need the cash so selling makes more sense) and then just run the arircraft, infrastructure and healthcare business efficiently.

[tiddman]

Holy smokes, I was surprised to see this thread here, which I started more than 7 years ago!

 

It was not a very good thesis, I never bought GE and hope I didn't convince anyone to do so.

 

In the Jack Welch era, many were skeptical of the underlying performance of the businesses, GE's accounting, and their reliance on GE Capital as a source of earnings.  The company generated a reputation as black belts in management but it looks more like an incompetent boys network.

 

Today I am not sure I see much that should interest shareholders.  If they do break up the business I think we'll get better insights into the performance of individual businesses, and we might not be too impressed by what we see.  Those that are interested in investing should ask themselves why exactly.  If it is due to their reputation, consider that the reputation is not justified.

[mwtorock]

it is currently in the too hard pile for me ;)

[vinod1]

Took a very quick look to see if a deeper dive makes sense

 

GE Industrial segment has revenues of about $114 billion. Assuming an EBIT margin of 15% (really the key assumption), operating earnings would be $17 billion. GE has corporate overhead of about $4 billion consisting of

 

a. $2 billion in pension costs to fund the $30 billion in pension under funding

b. $1.5 billion in corporate expenses

c. $0.5 billion in normalized restructuring expenses

 

GE Industrial segment has debt of $40 billion ($135 billion at GE less $95 billion at FS). At 5% rate, interest expense is $2 billion. Assuming a 20% tax rate, net income is about $9 billion or about $1 EPS based on 8.7 billion shares outstanding.

 

Slapping a PE multiple of 15, a reasonably case could be made for a minimum IV is about $15 per share. If operating margins increase by about 3%, earnings would increase by about $2.8 billion and add $5 to IV to about $20 per share.

 

Financial services unit  has shareholders equity of about $13 billion. It is expected that FS unit would start making money again from 2020 at about $500 million per year. So this unit is worth about $5 - $10 billion. So not a major contributor to IV.

 

If I had a gun to my head and my only choice is putting 5% of portfolio in either S&P 500 or GE, I would choose GE. But otherwise does not seem too attractive without a really good management and on which I do not have much insight.

 

Are there any big items that I am missing from the valuation? I ignored BHGE minority interests for example, but that does not add to the upside. I am wondering where the upside is that attracted many investors when it is in the $20's.

 

Vinod

 

[vinod1]

Going through the filings I would say that the only black-belt GE seems to have is in accounting - looking at how many non-GAAP measures ("Industrial operating + Verticals EPS" :) ) they define. Does not really answer many questions on individual business units - how much capital is employed, how much good will, what is ROC, etc.

 

Vinod

[txvalue]

Going through the filings I would say that the only black-belt GE seems to have is in accounting - looking at how many non-GAAP measures ("Industrial operating + Verticals EPS" :) ) they define. Does not really answer many questions on individual business units - how much capital is employed, how much good will, what is ROC, etc.

 

Vinod

 

This is certainly true about their acct & tax team, the FT ran an article a few days ago about their abilities.  Some have even been reassigned to their accounting firm as part of their restructuring so they can also help other companies while continuing to support GE.

 

The downside of this prowess is that they expect to be paying a higher tax rate these next few years now that the laws have changed.

 

As for the stock price I think the story can be simply stated. Management took on a too many things at once while trying to unwind GE Capital.  This was a mistake, but solid assets remain and I think it is priced at a decent risk reward level in the 15's.

 

[scorpioncapital]

I like the gun to head example - this is how all investing should be done :)

Gun to head: GE vs IBM - I'd go IBM.

Gun to head something else vs GE or IBM - something else :)

 

 

[no_free_lunch]

Gun to head: GE vs S&P500?

 

I'm going with S&P500 and yes I know how overpriced it is.