GE - General Electric

[Liberty]

All of it was disclosed ... plus, he spent time focusing on a very complex topic - so unlikely to get sued.  GE lost about $9bn in market-cap thursday ... my guess is they went to some really high-powered lawyers (Ackman did something very similar) and made sure everything was OK ahead of time.  He prob made $50M+ or more, depending how % profit sharing --- which he called 'really good'

 

Legally, possibly.

 

Ethically?

[Guest longinvestor]

After listening to Markopolos interviews, he comes across as an earnest fellow with a deep understanding of GE’s real situation after 7 months of forensics, likely one better than Culp himself. Me thinks that this is not the last word on this and Chapter 10 just ended @ GE. More interesting will be which other public companies get sucked into the vacuum cleaner as the spotlight falls on accounting practices. After all, GE practices were widely copied.

 

If the accounting is hard to understand, they don’t want you to. Buffett

[benchmark]

Thread: https://twitter.com/pegobry/status/1162253145625395200

 

I find  https://brontecapital.blogspot.com/2019/08/one-more-brief-comment-on-markopolis-ge.html?spref=tw more meaningful analysis.

[Guest cherzeca]

the ackman valeant situation primarily involved whether or not he was a joint tender offeror; valeant's filings would have been false and misleading if ackman was (and one of the titans of tender offer securities law, Steve Fraidin, opined that he wasn't).  in the case of markopolis, he has no duty to the market to disclose in advance of the publication of his own research, so this is not fraud or insider trading etc.  essentially, the HF financed his research (in an efficient way)

[Liberty]

https://www.ge.com/reports/follow-up-from-last-weeks-note/

[coc]

Hempton is either willfully misinterpreting Markopolous in regards to the "Too good to be true" part or doesn't understand it. He's not saying 14.6% is too good to be true for an industrial company -- he's saying GE isn't actually earning that much because they hide all kinds of losses elsewhere. In other words, if you look at the quality of their businesses as a composite, GE should be pounding out cash like Berkshire. And yet they aren't. And then he details why that is. It's very clear.

 

The constant comparison to Enron is tacky and unnecessary though, and takes away from the power of his arguments.

[Guest longinvestor]

Hempton is either willfully misinterpreting Markopolous in regards to the "Too good to be true" part or doesn't understand it. He's not saying 14.6% is too good to be true for an industrial company -- he's saying GE isn't actually earning that much because they hide all kinds of losses elsewhere. In other words, if you look at the quality of their businesses as a composite, GE should be pounding out cash like Berkshire. And yet they aren't. And then he details why that is. It's very clear.

 

The constant comparison to Enron is tacky and unnecessary though, and takes away from the power of his arguments.

 

Yes he’s painstakingly laid out his case but the flame throwing is a bit childish but hey, this is GE and his audience the entire world! If there’s one standout line, it’s Either the seven insurance companies we analyzed are lying in the statutory reporting or GE is.

HM insinuates that GE Insurance was run by incompetents for quite  a while and were bag holders at the expense of the seven insurers who knew what they were doing. Buffett often says that the insurance industry keeps coming up with new ways to lose money as if it’s not already lousy. GE appears to have picked the worst of insurance to err in. GE is not denying any of this and today’s “update” basically reads “we’re going to keep kicking the can down the road and yes, there could be bigger baths coming “. HM is correct in saying that Culp doesn’t understand the books given that GE has a history of changing accounting methods which makes it next to impossible to read across time periods.

 

 

[Spekulatius]

Hempton is either willfully misinterpreting Markopolous in regards to the "Too good to be true" part or doesn't understand it. He's not saying 14.6% is too good to be true for an industrial company -- he's saying GE isn't actually earning that much because they hide all kinds of losses elsewhere. In other words, if you look at the quality of their businesses as a composite, GE should be pounding out cash like Berkshire. And yet they aren't. And then he details why that is. It's very clear.

 

The constant comparison to Enron is tacky and unnecessary though, and takes away from the power of his arguments.

 

GE Aerospace is not gushing cash because the cash flows are backloaded in their aircraft engine business relative to profits (from service contracts), while earnings  tends to get booked more upfront.

Same with Rolls Royce, which has the same issues (and others) that the  FCF < Earnings. (I own some RR.L for full disclosure, purchased recently). The aircraft engine business is quite frankly not as great of a business than some make it to be, but it’s not a bad business either, it’s just that cash flows and earnings can have huge multi year cyclical offsets relative to each other. Of course this all assumes that accounting is kosher, which often when accrual accounting is used, tends to be an optimistic view.

[LongHaul]

A few comments and observations:

 

1.  If a short seller publishes a false statement then then can be deemed liable in court. 

You are entitled to your opinion though.  But basically if the report is filled with lies HM is taking personal risk.

And that is besides other risk you are taking.  Some bad companies have hired PI's, hacked into people's offices, etc.

 

2.  I have no idea if GE has been massively under reserved their insurance business. 

 

However, their reply "GE LTC insurance: First and foremost, we believe that our current reserves are well-supported for our portfolio characteristics."  gives me zero confidence.  What in the world are portfolio characteristics?  You are either conservatively reserved or you are not.  $15b in underreserving in 2017 and the general historical culture of GE leaves me skeptical.

 

3.  Unless I have taken a deep dive with insurance reserving expertise I will just say I don't know if they are properly reserved. 

 

I guess one has to ask if they really trust the mgmt at GE. 

[Liberty]

Hempton is either willfully misinterpreting Markopolous in regards to the "Too good to be true" part or doesn't understand it. He's not saying 14.6% is too good to be true for an industrial company -- he's saying GE isn't actually earning that much because they hide all kinds of losses elsewhere. In other words, if you look at the quality of their businesses as a composite, GE should be pounding out cash like Berkshire. And yet they aren't. And then he details why that is. It's very clear.

 

The constant comparison to Enron is tacky and unnecessary though, and takes away from the power of his arguments.

 

Comparing operating margins with an investment fund's returns is still really ridiculous, though.

[ValueMaven]

I've been buying GE recently on the long side --- in the low $8s ... mgmts large insider purchases are noteworthy

[wisowis]

I've been buying GE recently on the long side --- in the low $8s ... mgmts large insider purchases are noteworthy

 

The counter-point would be that Larry Culp needs to reach 10x base salary of GE ownership within 5 years of becoming CEO. I realize that leaves him a lot of time, but all you can give him credit for with this purchase is being smart enough to increase his ownership at maximum pessimism and after the stock plunges after a short report. Even after the purchases, he still only owns ~$9 million of GE shares, but he will have to reach $25 million, based on his $2.5 million salary.

 

His DHR (+ FTV spin-off) stake should be worth ~$23 million at current prices, by my math. I'd be very interested if I saw that amount of ownership in GE.

 

(full disclosure, I am a huge fan of Larry Culp based on his DHR tenure)

[Spekulatius]

I am going though Markopolos short report - there were a few things I noticed:

 

1) The last actuary  test for the insurance co was done last November, before Fuld became CEO. It is likely that.p  GE in the insurance teach in in March 2019 then claimed the adjustment was close zero as higher losses were compensated for with higher interest rates. Without higher discount rates resulting from higher interest rates, the adjustment would have been $1.9B. The way interest rates likely are going, I think this discount rate will get dialed down again.

 

2) I am curious about this difference between statutory and GAAP reserved. If the books indeed get aligned around the statutory assumptions, the GE indeed will take a significant hit against equity.

 

3) I don’t see what he sees with respect to BHGE accounting treatment.

 

Looks to me that GE May indeed be short on cash. It all depends on aircraft engines becoming more cash flow positive. If not, I see some sort of a deal with Berkshire and we know how they work :-).

[dwy000]

Fuld was the head of Lehman Bros. CEO of GE is Culp.  Freudian slip perhaps? Or just unfortunate auto correct.

[SharperDingaan]

You might want to do some high-level comparison against FFH - back when they were the target of a similar short-selling attack.

 

The short-case was, indeed, partially correct - but not really proveable.

We know that, because FFH subsequently went through a long period when 'pot-holes' kept unexpectedly showing up. If everything was going as smoothly as claimed, it shouldn't have been such a 'rocky' road.

 

Long-tail 'Insurance' is a very murky business.

Firms get to 'manufacture' the size of their future liability (recognition, and discount rates), the future value of their offsetting assets, and amortize any currrent losses forward. Arcane actuarial/accounting treatment that is difficult to explain, and highly confusing to the average Joe. The natural bias is to think the worse and sell down - when in fact, there's actually nothing wrong.

 

The attack has two stages; 1) the initial accusation/supported claim, and 2) collapse of the targets defense. The drawback is that the shorter has to continuously roll their loans, and play the option markets to maintain/increase their position. It's a melting ice-cube, with time not on the shorters side.

 

For HM to win stage 2, GE has to find it impossible/difficult to roll its short-term debt as it comes due - as was the trigger the last time WEB came to their 'rescue'. The downside is that if the 'rescuer' has also been a buyer of the shorted/re-lent shares, their intervention squeezes the short two-ways. To win; the target has to be hit hard, isolated, and gased quickly.

 

Obviously, everyone will have their own views.

But a little context here, could take you a long way  ;)

 

SD

 

 

 

 

[EricSchleien]

Published this yesterday. We talk quite a lot about GE.

 

https://ericschleien.com/podcast/glenn-surowiec-index-investing-bubble-general-electric/

[ValueMaven]

Anyone warming up here?  Culp has really turned the biz around - and the stock is down a lot in a short period of time. 

[Xerxes]

There is recent short interview Tusa on CNBC, the analyst from JPM, although he is upgrading he is making good points on some headwinds.

[Jurgis]

https://smile.amazon.com/Untitled-Houghton-Mifflin-Harcourt/dp/0358250412/ref=sr_1_3?dchild=1&keywords=lights+out&qid=1597781954&sr=8-3

 

The book about GE "Lights Out" is free to read with Amazon Prime.

[Jurgis]

https://smile.amazon.com/Untitled-Houghton-Mifflin-Harcourt/dp/0358250412/ref=sr_1_3?dchild=1&keywords=lights+out&qid=1597781954&sr=8-3

 

The book about GE "Lights Out" is free to read with Amazon Prime.

 

The book is boring, repetitive, facts-lite, disorganized, not really in depth, and not insightful.

Pretty much avoid. Just read GE Wikipedia page instead.

[coc]

https://smile.amazon.com/Untitled-Houghton-Mifflin-Harcourt/dp/0358250412/ref=sr_1_3?dchild=1&keywords=lights+out&qid=1597781954&sr=8-3

 

The book about GE "Lights Out" is free to read with Amazon Prime.

 

The book is boring, repetitive, facts-lite, disorganized, not really in depth, and not insightful.

Pretty much avoid. Just read GE Wikipedia page instead.

 

Yeah, I read through it the other day. There's no "behind the scenes" at all. The reporter was very lazy.

[Xerxes]

Interview with Immelt on CNBC, looking back at his legacy, GE Capital, Alstom acquisition, current leadership.

 

https://www.msn.com/en-us/money/other/watch-cnbcs-full-interview-with-former-ge-ceo-jeff-immelt/vp-BB1dUyJV

 

You can watch it through MSN, so you can dodge the firewall from CNBC which should go up at any moment. There is also another shorter interview on Bloomberg.

 

[villainx]

I assume something similar from Freakanomics: https://freakonomics.com/podcast/jeff-immelt/

 

Also can be found with your fav podcast app.

[villainx]

Though this might be more relevant: https://southeasternasset.com/podcasts/ge-larry-culp-on-lean-manufacturing-culture-and-covid/

 

Or look via your fav podcast app.

[Xerxes]

Thanks i had listen to the Southeastern podcast few weeks ago, but they mostly covered Six Sigma and other things not much to do with valuation,

So i didnt post it here.

 

On the Bloomberg interview, there was a question with Vestas's valuation so high, shouldnt GE ultimately looking into capturing as a spin off of a sort