GE - General Electric

[Contra123]

Aviation is decent but why not just own Safran, Rolls-Royce, UTX, or a basket of BA/Airbus/TDG etc, instead of GE?

[Contra123]

More importantly, if Aviation is worth $70 billion EV, what are the other pieces worth, cumulativey? Are they worth more than the $100+ Bil of net debt and another $25+ Bil of net pension obligations?

[rb]

I own Rolls-Royce. Which is also having it's cash flow problems due to the cycle. Snecma inside of Safran is great but I'm not too crazy about the rest of its security business.

[peterHK]

Lets say Aviation is worth $75bn, and generates all their FCF. I don't dispute that, and I do agree it's valuable.

 

They have $100bn of debt, $30+bn of underfunded pension, GE capital is moving into loss because their commercial paper funding just got cut off because Moody's downgraded them. So what FCF is there left to service all those liabilities?

 

You CAN'T separate the aviation business from the rest because of the liabilities. What you can do is sell the loss making businesses or wind them down, and gradually pay down the debt over time. But that takes year and years, and in the meantime, you as an investor face the opportunity cost of having dead money for years.

 

I think Culp is doing 100% the right things, and he knows what the risks are and he is trying to address them as best he can. At some point the price will be right, but not now, not with the liabilities they have and where we are in the cycle.

[DTEJD1997]

Lets say Aviation is worth $75bn, and generates all their FCF. I don't dispute that, and I do agree it's valuable.

 

They have $100bn of debt, $30+bn of underfunded pension, GE capital is moving into loss because their commercial paper funding just got cut off because Moody's downgraded them. So what FCF is there left to service all those liabilities?

 

You CAN'T separate the aviation business from the rest because of the liabilities. What you can do is sell the loss making businesses or wind them down, and gradually pay down the debt over time. But that takes year and years, and in the meantime, you as an investor face the opportunity cost of having dead money for years.

 

I think Culp is doing 100% the right things, and he knows what the risks are and he is trying to address them as best he can. At some point the price will be right, but not now, not with the liabilities they have and where we are in the cycle.

 

What if you are off on your assumption of value for aviation by 10% or 20%?

 

GE is still a manufacturing company, and they are going to have to spend some of their cash flow replacing worn out equipment.

 

If they wind down GE capital, that should get rid of a lot of the debt (assuming the assets there equal or come close to the debt).

 

Assume they have $2BB of free cash flow from the manufacturing divisions.  It would take them years, probably DECADES to pay off the debt.

 

If things get worse for GE, economic downturn?, you could make an argument that GE is wildly overvalued.  You could also go on to make an argument that GE might even have to file bankruptcy.  I think that might be a stretch at this point, but it is not zero percent chance or even a 1-2 percent chance.

 

It is shocking how bad thing got at GE, and shocking how fast it is coming apart.

[peterHK]

Lets say Aviation is worth $75bn, and generates all their FCF. I don't dispute that, and I do agree it's valuable.

 

They have $100bn of debt, $30+bn of underfunded pension, GE capital is moving into loss because their commercial paper funding just got cut off because Moody's downgraded them. So what FCF is there left to service all those liabilities?

 

You CAN'T separate the aviation business from the rest because of the liabilities. What you can do is sell the loss making businesses or wind them down, and gradually pay down the debt over time. But that takes year and years, and in the meantime, you as an investor face the opportunity cost of having dead money for years.

 

I think Culp is doing 100% the right things, and he knows what the risks are and he is trying to address them as best he can. At some point the price will be right, but not now, not with the liabilities they have and where we are in the cycle.

 

What if you are off on your assumption of value for aviation by 10% or 20%?

 

GE is still a manufacturing company, and they are going to have to spend some of their cash flow replacing worn out equipment.

 

If they wind down GE capital, that should get rid of a lot of the debt (assuming the assets there equal or come close to the debt).

 

Assume they have $2BB of free cash flow from the manufacturing divisions.  It would take them years, probably DECADES to pay off the debt.

 

If things get worse for GE, economic downturn?, you could make an argument that GE is wildly overvalued.  You could also go on to make an argument that GE might even have to file bankruptcy.  I think that might be a stretch at this point, but it is not zero percent chance or even a 1-2 percent chance.

 

It is shocking how bad thing got at GE, and shocking how fast it is coming apart.

 

FCF is post capex, so I don't understand your replacing equipment comment.

 

GECS value is ~-3/share: they have $25bn of off balance sheet liabilities, and burn $3bn of cash a year. The wind down of this will not be pretty.

 

The result, exing out GECS is that GE INDUSTRIAL leverage is 10x 2019 numbers, which are worse than midcycle for a lot of their businesses, but that level of leverage is obviously unsustainable.

 

 

 

[nickenumbers]

I sense this has become a discarded cigar butt with some puffs left on it.  We can value it based on FCF, or we can value it based on liquidation.  Either way I think she can get back in shape and run some more races, or she can get downsized with some incoming cash based on the sold off parts.  Human psychology is to worry about worst case, going to zero, but that rarely happens.  What about the intangible value of GE too big to fail??  The US government will not let it happen. 

 

The significant upsides seems far more likely to me now than significantly more downside.  Additionally, all the scared caution and concern should make us feel more confident about it on a day that it goes down by 6.65%.

 

I valued it today, and I bought LEAP call options at $13 per share.

 

 

[Spekulatius]

How good is this aircraft engine business really, if you can have droughts of 5 or even more years in terms of FCF? It’s a compounding business, but it’s not worth as much than a business with s steady cash flow. It’s particular not suitable to carry a high debt load, because cash flows are not stable and it is of uttermost Importance that the customers don’t get antsy about your viability to meet future guarantees (implicit or explicit). I think Rolls Royce, with a $15B market cap and no net debt may be the better bet here, despite the issues with their engines, which are costly to resolve. At least they have a near net debt free balance sheet and probably an implied guarantee from the British government they they will be around, even if something untoward would happen (they were bailed out before the 70’s I think).

 

One thing is certain, the aircraft business would be worth more than in a corporate umbrella that is cash rich like BRK. BRK can and will happily sit out a 5 year FCF drought for a compounder. That’s one of the reason why I believe some sort of a deal between BRK and GE will occur. GE has trouble with cash flow and is incompetent in insurance. BRK has both competence and cash in spades. GE needs to do something to raise capital or this may circle down the drain ,if the credit get cut to junk and the customers become antsy. The deal would probably very good for BRK, because GE would not just pay up for the cash,  but also for BRK reputation. I am betting on a phone call when Warren sits in the bathtub.:-). It has happened before....

[xo 1]

How good is this aircraft engine business really, if you can have droughts of 5 or even more years in terms of FCF? It’s a compounding business, but it’s not worth as much than a business with s steady cash flow. It’s particular not suitable to carry a high debt load, because cash flows are not stable and it is of uttermost Importance that the customers don’t get antsy about your viability to meet future guarantees (implicit or explicit). I think Rolls Royce, with a $15B market cap and no net debt may be the better bet here, despite the issues with their engines, which are costly to resolve. At least they have a near net debt free balance sheet and probably and implied guarantee from the British government they they will be around, even if something untoward would happen (they were bailed out before the 70’s I think).

 

One thing is certain, the aircraft business would be worth more than in a corporate umbrella that is cash rich like BRK. BRK can and will happily sit out a 5 year FCF drought for a compounder. That’s one of the reason why I believe this some sort of a deal between BRK and GE will occur. GE has trouble with cash flow and is incompetent in insurance. BRK has both competence and cash in spades. GE needs to do something to raise capital or this may circle a brought the drain ,if the credit get cut to junk and the customers become antsy. The deal would probably very good for BRK, because GE would not just pay up for the cash,  but also for BRK reputation. I am betting on a phone call when Warren sits in the bathtub.:-). It has happened before....

I would love to see BRK get into an aviation business line that makes more sense than the airlines.  Could fold it into Precision Castparts - a nice bolt-on.

[peterHK]

I sense this has become a discarded cigar butt with some puffs left on it.  We can value it based on FCF, or we can value it based on liquidation.  Either way I think she can get back in shape and run some more races, or she can get downsized with some incoming cash based on the sold off parts.  Human psychology is to worry about worst case, going to zero, but that rarely happens.  What about the intangible value of GE too big to fail??  The US government will not let it happen. 

 

The significant upsides seems far more likely to me now than significantly more downside.  Additionally, all the scared caution and concern should make us feel more confident about it on a day that it goes down by 6.65%.

 

I valued it today, and I bought LEAP call options at $13 per share.

 

What numbers are you using for your SOTP that gets you even remotely close to $13/share?

 

[Dalal.Holdings]

https://www.reuters.com/article/us-ge-outlook/ge-sticks-to-2-eps-target-for-2018-sells-more-assets-idUSKBN1432N6

 

DECEMBER 14, 2016

 

In affirming a target of $2 a share in operating earnings in 2018, Chief Executive Officer Jeff Immelt said GE would overcome expected weakness in its oil and gas business next year and dropped cautiousness the company had expressed in October.

 

:o

 

Any assessment of this company should begin with the balance sheet, not the other two statements. Uncle Warren ain't gonna be interested in the high price which will be necessary due to the liabilities side of the b/s. A lot better opportunities out there than this for Warren and just about any investor. Chapter 11 may not be so bad anyway (aviation/healthcare can emerge from the ashes).

 

A gov't bailout is probably not in the cards as GE is not a systemically important financial institution like it was 10 years ago (when GE Capital was much larger)...let alone trying to figure out if this administration would even be interested in a bailout even if it were systemically important. Anyway, equity holders would be hosed regardless.

[Spekulatius]

The opportunity for BRK depends on how a deepal is structured. I believe it could be a carve out of GE’s insurance business or parts thereoff (to be runoff - BRK has done this before) or and equity preferred raise at favorable conditions  or an outright purchase of a whole or part of a business sans any corporate liabilities. In any case, I would expect that GE shareholders would scream bloody murder after seeing the deal conditions. I do agree that an outright GE takeover by BRK is unlikely.

[rb]

How good is this aircraft engine business really, if you can have droughts of 5 or even more years in terms of FCF? It’s a compounding business, but it’s not worth as much than a business with s steady cash flow. It’s particular not suitable to carry a high debt load, because cash flows are not stable and it is of uttermost Importance that the customers don’t get antsy about your viability to meet future guarantees (implicit or explicit). I think Rolls Royce, with a $15B market cap and no net debt may be the better bet here, despite the issues with their engines, which are costly to resolve. At least they have a near net debt free balance sheet and probably and implied guarantee from the British government they they will be around, even if something untoward would happen (they were bailed out before the 70’s I think).

 

One thing is certain, the aircraft business would be worth more than in a corporate umbrella that is cash rich like BRK. BRK can and will happily sit out a 5 year FCF drought for a compounder. That’s one of the reason why I believe this some sort of a deal between BRK and GE will occur. GE has trouble with cash flow and is incompetent in insurance. BRK has both competence and cash in spades. GE needs to do something to raise capital or this may circle a brought the drain ,if the credit get cut to junk and the customers become antsy. The deal would probably very good for BRK, because GE would not just pay up for the cash,  but also for BRK reputation. I am betting on a phone call when Warren sits in the bathtub.:-). It has happened before....

The are engine business is very good. It's very good because it's very profitable. Yes cash flows are lumpy but that just the way it is.

 

An imperfect comparison is the insurance policies at GEICO. The policies were very profitable and had a large PV. So naturally you would want to sell lots of those. But they didn't because if they did GEICO's financials would look like crap due to sales costs and negative cash flow up front. Then Berkshire scoops up that baby and puts the pedal to the metal on sales. It's the same sort of thing on a much grander scale with aero engines.

 

I like and own Rolls. But it's a bit of a different business. They exited the narrow body business a number of years ago and now they're mainly in the wide body business. They're the leader in wide body, but just somewhat ahead of GE. In the narrow body, which is a much bigger business, GE/Snecma's engines are the undisputed leader. Also in wide-body GE seems to be the "better player" from a manufacturing efficiency perspective. Rolls has negative margin on their engines whereas GE actually has a bit of a positive margin on their wide body engines - which is a huge thing in this business.

 

I agree that GE would be a nice fit for a Berkshire division. There are problems though. You can't get a phone call in the bath tub for a preferred deal. At this point it would be all or nothing. A preferred just doesn't make sense. I think that GE would make sense for BRK at $10/share. That's a 25% premium so it's not even cheap. But GE was at 10 just 2 weeks ago, so there's no way that their shareholders would go for that. Then there's PCP. Every GE Aviation competitor is a big PCP customer and they would have a BIG problem with the deal. So I don't really see a deal here at this point.

 

The nightmare scenario for GE is this. The market start to get really worried about their leverage and they start to have problems refinancing. To top that off lets say you get another nasty surprise from their insurance portfolio. Now the stock drops like a rock and the market starts to really think that it may become a doughnut. They can't sell power because of anti-trust. Doesn't make sense to spit power from aviation or to just sell aviation. A big sovereign fund can't come in to save the day because of the military engines and the nuclear business. At that point Berkshire is literally the only company that can save them and a deal gets put together. I mean, I guess Apple could also do it, but why would they?

[nickenumbers]

 

 

What numbers are you using for your SOTP that gets you even remotely close to $13/share?

 

I used a SOTP value of $8B, $10B and $12B to see what that would do to the per share value.

 

Part of my strategy would not necessarily be to hold it to $13, perhaps I would sell it at 10, if the option value went up by 50-80%.  Certainly, if it got to $13, it might be a 2X, or a 4X.

 

In terms of good risk control, my bet size is proportional to the risk [smaller bet].

 

[peterHK]

https://www.reuters.com/article/us-ge-outlook/ge-sticks-to-2-eps-target-for-2018-sells-more-assets-idUSKBN1432N6

 

DECEMBER 14, 2016

 

In affirming a target of $2 a share in operating earnings in 2018, Chief Executive Officer Jeff Immelt said GE would overcome expected weakness in its oil and gas business next year and dropped cautiousness the company had expressed in October.

 

:o

 

Any assessment of this company should begin with the balance sheet, not the other two statements. Uncle Warren ain't gonna be interested in the high price which will be necessary due to the liabilities side of the b/s. A lot better opportunities out there than this for Warren and just about any investor. Chapter 11 may not be so bad anyway (aviation/healthcare can emerge from the ashes).

 

A gov't bailout is probably not in the cards as GE is not a systemically important financial institution like it was 10 years ago (when GE Capital was much larger)...let alone trying to figure out if this administration would even be interested in a bailout even if it were systemically important. Anyway, equity holders would be hosed regardless.

 

LOL GE's "earnings" are bullshit. Look at their walk to actual FCF from earnings and its a meaningless measure.

 

FCF is $0 for 2018.

[peterHK]

 

 

What numbers are you using for your SOTP that gets you even remotely close to $13/share?

 

I used a SOTP value of $8B, $10B and $12B to see what that would do to the per share value.

 

Part of my strategy would not necessarily be to hold it to $13, perhaps I would sell it at 10, if the option value went up by 50-80%.  Certainly, if it got to $13, it might be a 2X, or a 4X.

 

In terms of good risk control, my bet size is proportional to the risk [smaller bet].

 

Where are you getting $8/10/12 from? Is that EBITDA, free cash? Why will they earn anywhere close to that? If you're using EBITDA why is that relevant given GE's bad FCF conversion? What do peers trade at? Why is GE deserving of a peer multiple.

[nickenumbers]

 

 

What numbers are you using for your SOTP that gets you even remotely close to $13/share?

 

I used a SOTP value of $8B, $10B and $12B to see what that would do to the per share value.

 

Part of my strategy would not necessarily be to hold it to $13, perhaps I would sell it at 10, if the option value went up by 50-80%.  Certainly, if it got to $13, it might be a 2X, or a 4X.

 

In terms of good risk control, my bet size is proportional to the risk [smaller bet].

 

Where are you getting $8/10/12 from? Is that EBITDA, free cash? Why will they earn anywhere close to that? If you're using EBITDA why is that relevant given GE's bad FCF conversion? What do peers trade at? Why is GE deserving of a peer multiple.

 

Peter,

 

Good input.  What do you think the FCF is?  What would you estimate it to be?  It sounds like you are significantly more bearish than I am.  Are you considering shorting it or buying PUTs on it?  Where do you see GE in 12 or 18 months?

 

I think there is significant going concern value in GE.  They have a lot of institutional knowledge.  They are not in great shape, but they are not dead.  Assuming that their FCF is at or near 0 now, and that it will continue that way is a potentially bad assumption.  Assuming the present circumstances into the future is a very common psychological misjudgement, and it is easy to do.  I would not project the present state of losses into the future, and I would not assume that GE is going to 0.  I might be wrong, it could happen, but it is a very low probability.  I think this has a better than 50/50 chance of going up from here over the next 12 months, and if it does go up, the pay off is going to be near 2 to 1 in some call option vehicles.

 

I might be wrong and I might be missing something.  I also put value in selling off segments of the business if necessary.  Thanks man.

[no_free_lunch]

The health care, aviation and maybe transport business could be worth quite a bit in a spinoff, if you exclude liabilities.  Start to factor in some guesses on debt load and then taxes, it gets less exciting.  Does anyone have any thoughts on what type of debt/pension the spinoffs would take on?

[peterHK]

 

 

What numbers are you using for your SOTP that gets you even remotely close to $13/share?

 

I used a SOTP value of $8B, $10B and $12B to see what that would do to the per share value.

 

Part of my strategy would not necessarily be to hold it to $13, perhaps I would sell it at 10, if the option value went up by 50-80%.  Certainly, if it got to $13, it might be a 2X, or a 4X.

 

In terms of good risk control, my bet size is proportional to the risk [smaller bet].

 

Where are you getting $8/10/12 from? Is that EBITDA, free cash? Why will they earn anywhere close to that? If you're using EBITDA why is that relevant given GE's bad FCF conversion? What do peers trade at? Why is GE deserving of a peer multiple.

 

Peter,

 

Good input.  What do you think the FCF is?  What would you estimate it to be?  It sounds like you are significantly more bearish than I am.  Are you considering shorting it or buying PUTs on it?  Where do you see GE in 12 or 18 months?

 

I think there is significant going concern value in GE.  They have a lot of institutional knowledge.  They are not in great shape, but they are not dead.  Assuming that their FCF is at or near 0 now, and that it will continue that way is a potentially bad assumption.  Assuming the present circumstances into the future is a very common psychological misjudgement, and it is easy to do.  I would not project the present state of losses into the future, and I would not assume that GE is going to 0.  I might be wrong, it could happen, but it is a very low probability.  I think this has a better than 50/50 chance of going up from here over the next 12 months, and if it does go up, the pay off is going to be near 2 to 1 in some call option vehicles.

 

I might be wrong and I might be missing something.  I also put value in selling off segments of the business if necessary.  Thanks man.

 

GECS has $102bn of assets, against $125bn of liabilities including an $11bn known insurance liability, $70bn in debt, and $41bn in insurance contracts. They also have indemnifications, insurance true ups, investigation costs etc. that add another ~$10-12bn in liabilities. The result is net liabilities of $32bn, and that's marking assets at book when in liquidation they will be worth less than that. On a book value basis, GECS is a drag on any SOTP analysis of about $2/share. 

 

Further, it's important to note that GECS windown leaves that book value hole as DEBT borne by the industrial company; an already very leveraged industrial company.

 

 

On FCF, Power & Renewables are a drag with $0 profit, let alone FCF. GECS burns $2.7bn of cash a year (burned $1.5bn last year, they have a wall of maturities coming up at higher rates that shaves off anover $1bn, and then they are stepping up capex at GECS another $200mn), that is obviously a drag (and you can't just say oh it goes away; recall the leftover liabilities AFTER a windown of GECS). Oil and Gas is long cycle and it hasn't recovered nor is it likely to, so that's basically $0 FCF. The problems with Power are structural and well documented. Renewables lost MORE money on higher revenues this year, and that doesn't change in 2019 either. Unless oil prices go up, don't see how oil works.

 

The remaining pieces (healthcare and aviation) generate about $0.60/share in FCF in 2018. Aviation pulled forward some PnL in Q4 2017 due to accelerated parts sales etc. Take off $0.11 for divestitures, and you're down to $0.49 in 2019 assuming the business is flat (growth in HC/Aviation offset by continuing problems in power/renewables etc.). IN 2020, they need to do $1bn (0.12/share) of pension contribution, and since that comes before equity, your FCFE is probably flat from 2019.

 

 

At a 17x multiple, which is about the sector average, on 2019E I get $8/share in equity value. Same multiple gets me $8 in 2020 as well. Take off that $2 in GECS value, and you get to $6/share, which is below where it trades today.

 

So, to sum up:

 

1) GECS burns cash.

 

2) Stopping GECS burning cash and winding it down leaves industrial co with $30+ bn in liabilities

 

3) Their markets are long cycle, 3/5 of their segments have issues that aren't going to get fixed in the next year or two. The remaining 2 are very good buinsess BUT:

 

4) Those businesses are saddled with a combined $100bn of liabilities (add up their debt, pension, GECS hole, Insurance other costs, soft liabilities etc. and generate ~$10bn of segment profit, so they're levered 10x.

 

5) Tighter monetary policy around the world, a trade war, and simly the length of cycle we're in means a recession is probable between now and 2020. Do you want to be long a 10x levered, long cycle industrial business at 17x FCF when companies like HON with a net cash balance sheet trade at 17x?

 

6) Everyone knows #5, which is why GE's CDS, Preferred and bond spreads have ALL blown out. That creates yet ANOTHER issue for the company: they don't generate enough FCF to delever on their own, they have to roll their capital structure. Now, in addition to higher rates globally, there's higher credit costs for GE. That prolongs deleveraging and puts the company at greater risk they catch a downturn while highly levered.

 

I fail to see how there's a long case here, and further, all the SOTP cases are bunk because of the complexity of winding everything down and separating it. I don't think power/renewables/and oil are worth $0, but even if they're worth $30bn, that's still $70bn of liablities on $10bn of segment profit or 7x leverage, and again, I ask you the same question: why would you be long a 7x levered long cycle industrial at the tail end of a cycle when there are better names out there.

 

At $50bn math still stands: why be long a 5x levered long cycle company.

 

You really need to think that power/renewables/oil are worth $70bn+ for this to start to make sense from a leverage standpoint (getting to 2.5 to 3x leverage), but given they basically earn nothing today, lets say they're worth 12x EBITDA, what's the walk for those businesses from $0 to almost $6bn in EBITDA? I don't see it.

 

[james22]

The nightmare scenario for GE is this. The market start to get really worried about their leverage and they start to have problems refinancing. To top that off lets say you get another nasty surprise from their insurance portfolio. Now the stock drops like a rock and the market starts to really think that it may become a doughnut. They can't sell power because of anti-trust. Doesn't make sense to spit power from aviation or to just sell aviation. A big sovereign fund can't come in to save the day because of the military engines and the nuclear business. At that point Berkshire is literally the only company that can save them and a deal gets put together. I mean, I guess Apple could also do it, but why would they?

 

Nightmare?

 

As a BRK shareholder sounds great!

[rb]

Well... I said the nightmare scenario for GE. For Berkshire sure. This would be the ultimate elephant. And you know that Buffett's watching this and licking his lips. It would be his crowning achievement. But we're not there yet. If we get there, the supermassive black whole that is BRK will turn into a quasar as it swallows GE. Then it'll burp, it's belly full will take a nap for a while.

[khturbo]

So they're selling off a chunk of their BHGE stake. Doesn't exactly seem like they're receiving the best valuation for it. I'm sure they don't need the money though lol.

[DTEJD1997]

Hey all:

 

I don't think there is any way BRK is going to get involved with buying GE.  The exception being if BRK loans money to GE at some high rate with an equity kicker.

 

BRK looks for high quality companies.  I don't think GE fits that bill.

 

BRK looks for companies that can largely run themselves, GE is going to go through massive transformation, and will need all sorts of help.

 

BRK does not look for turnaround situations,  GE does not fit that bill.

 

So I am sorry to say, I just don't see it.

[nkp007]

I bet Buffett views GE the same way he viewed AIG during the crisis. Interesting company, probably some opportunity, but such a black box that it makes no sense to buy it at the parent level. Makes sense to buy some parts of it unencumbered by the liabilities that plague the parent co, but at a huge discount.

[sleepydragon]

I guess all new ceos like to do this: restate everything so have bars lowered for them.Remind me FSLR a few years ago. But sometimes when they do this the bottom falls out.