GE - General Electric

[Spekulatius]

Hey all:

 

I very much suspect that there is more risk hidden in GE than what easily comes to the eye.  The largest thing appears to be the valuation.  How is this thing trading for a EV/EBIDTA of 18 at $21.50/share?

 

Then you've got the debt.  Something like $170BB vs. $14BB in cash.  Debt is something like 9.5X EBIDTA.

 

Further, you've got the pension deficit.

 

This thing just screams disaster waiting to happen.  If the economy does well, they'll muddle through.  If the economy has serious trouble, GE is probably going to have serious trouble ala 2008.

 

I think there are still a lot of legacy investors in GE, and a METRIC TON of investors that think GE is safe.

 

If perception changes, the valuation will also...

 

EV/EBITDA is misleading, since they still have a considerable financial operation, most of which is linked to their industrial business with some legacy stuff added in.

 

Just look at the EV/EBITDA of many car companies that have their own fencing arm, those don’t look thwt great either on the surface.

[walkie518]

rb,

 

Yes, GE is very complex.  Considering what's going on, coming up with any kind of valuation is tricky. 

 

That said, at some point, the stock is a good buy...less is always better, but is it a good buy at $20/sh over the next 5 years is what I'm trying to figure out.

 

In some ways, if GE is trading for $20/sh, one model could put the shares at a 10% discount to value.  Another could put the shares at 50%. 

 

I did give the aviation division a generous valuation, but it might be deserved.  Power was the only division that I discounted very heavily, but Siemens and GE are it.  There should be part of a duopoly?

 

Treasury shares should be worth something.  These are shares that GE bought and at any point GE could sell them back into the open market (disregarding the implications).

 

Could the treasury shares be contributed to the pension?  If the company's cost is lower than the market value, GE can contribute less and get more?

 

How would you otherwise value a (contra)asset that could be sold readily? 

 

Why do you think Aviation is overpriced at $80B or Healtcare at $50B?

[rb]

I did give the aviation division a generous valuation, but it might be deserved.  Power was the only division that I discounted very heavily, but Siemens and GE are it.  There should be part of a duopoly?

 

Treasury shares should be worth something.  These are shares that GE bought and at any point GE could sell them back into the open market (disregarding the implications).

 

Could the treasury shares be contributed to the pension?  If the company's cost is lower than the market value, GE can contribute less and get more?

 

How would you otherwise value a (contra)asset that could be sold readily? 

 

Why do you think Aviation is overpriced at $80B or Healtcare at $50B?

Treasury shares are worth zero. They're just an accounting artifact of US GAAP. Any company can readily issue shares whether they have a treasury shares or not. That doesn't mean they have an asset. You most definitely don't count treasury shares as an asset and then us the market cap with a reduced count. Just forget about the treasury shares.

 

Aviation is probably overvalued at 80B. But maybe not by that much. Healthcare is definitely overvalued at $50B. It's maybe worth 30B.

[LongHaul]

GE while it has some nice businesses has super complex financials.  I couldn't reconcile their segment data to consolidated a few years ago which was a first.  The annual was overly hard to figure out. In my opinion I think it was on purpose.  Lots and lots of spin.  Made me really dizzy.

 

Recently if one looks at the Alstom deal there seemed to be (if I was doing accurate analysis) post deal increases in liabilities and decreases in assets by very, very large amounts - we are talking billions.  Bad disclosure and I could not figure it all out. 

 

Yesterday someone said their neighbors would never buy a GE appliance because they were garbage. 

I recently bought a tube of Silcone from Home Depot with the GE name on it and it was dried and I had to return it. 

 

I used to rank GE a 9 as for as how well run the company was - now  would give it a 2.  I just keep hearing so many negative stores about the mgmt systems, to aggressive accounting to massive spin in the annual that my respect for the company keeps declining. 

 

I am very curious of other qualitative scuttlebutt other have

 

I would avoid the company unless you can figure out if and where and for how much GE has been aggressive in its earnings. 

 

 

[Junto]

GE while it has some nice businesses has super complex financials.  I couldn't reconcile their segment data to consolidated a few years ago which was a first.  The annual was overly hard to figure out. In my opinion I think it was on purpose.  Lots and lots of spin.  Made me really dizzy.

 

Recently if one looks at the Alstom deal there seemed to be (if I was doing accurate analysis) post deal increases in liabilities and decreases in assets by very, very large amounts - we are talking billions.  Bad disclosure and I could not figure it all out. 

 

Yesterday someone said their neighbors would never buy a GE appliance because they were garbage. 

I recently bought a tube of Silcone from Home Depot with the GE name on it and it was dried and I had to return it. 

 

I used to rank GE a 9 as for as how well run the company was - now  would give it a 2.  I just keep hearing so many negative stores about the mgmt systems, to aggressive accounting to massive spin in the annual that my respect for the company keeps declining. 

 

I am very curious of other qualitative scuttlebutt other have

 

I would avoid the company unless you can figure out if and where and for how much GE has been aggressive in its earnings.

 

Agree and consider it a potential short stock/strong sell into the teens. Recent correspondence continues to demonstrate a poor outlook for the immediate future so it is really dead money either way.

[rb]

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.

[no_free_lunch]

In addition to being a black box I don't even see it as all that cheap.  It actually feels fairly priced right now given the uncertainty in the financials.  I mean you have average annual earnings forecast of $1.25 for next year and honestly when I look at their financials that seems generous.  So if analysts are right it's at 16x earnings.  Not too cheap, not expensive, but it seems like a reasonable price level given $1.25 is a forecast and there are so many unknowns.

 

I feel it was overpriced before, gliding on it's past reputation.  It is now at a more reasonable valuation given reality.

[DTEJD1997]

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.....It remains to be seen if the new CEO is serious about cleaning the company up or will turn back to the old tricks.

 

There is a story out by the Wall Street Journal:

 

https://www.wsj.com/articles/ge-board-was-kept-in-the-dark-about-ceos-extra-plane-1509274805

 

Apparently, there was a 2nd jet (empty) that would follow the CEO around in case the primary jet broke down by the side of the road. 

 

The really strange thing is that nobody knows how or why this was going on.  Nor does anybody know approved and ordered this, ESPECIALLY Mr. Immelt.

 

How can you be the CEO of the company and not know about this?  How did the board not know about this?

 

How many other things do they NOT KNOW ABOUT?

 

I'm not going to call this fraud, but I most certainly call "shenanigans"...

[james22]

-4% yesterday, -26% YTD

 

Ever a point when attractive?

At $20 per share it starts to get attractive. At $17 turn the taps full on.

 

Agreed. It's too early right now to jump in.  No proof that Flannery can turn the table but he will need to move aggressively. I was never a fan of Immelt and Immelt can argue he made strides in the pages of the Harvard Business Review but the stock has not supported this outlook.

 

I will be a buyer at $20 or lower as well.

 

$19.17 and falling...

[DTEJD1997]

hey all:

 

GE just cut the dividend in half.  The stock is only down $1.52/share.

 

I would think there would be a FLOOD of retired "income" investors getting out of this thing.

 

Same thing with mutual funds.

 

I guess they have very good management and very good spin doctors.

 

[no_free_lunch]

Adjusted earnings are supposed to come in around $1 per share.  Real earnings at ~$0.80.  It feels now like it is reasonably priced relative to market.  Still a giant black box that I won't even attempt to understand.

[rb]

Ouch it's at 18.80 now. This is brutal. I didn't have a chance to go through all the investor day stuff. I hopefully will do that tonight. But the highlights seemed promising.

 

After all this selloff it must be getting to somewhere around reasonable value/potentially cheap. I think there may be more downside from here if they get kicked out of the DOW - the flip side of indexing. On the other hand if GE gets the boot, what do you think? BRK in the Dow? Replace one conglomerate with another?

[rishig]

Ouch it's at 18.80 now. This is brutal. I didn't have a chance to go through all the investor day stuff. I hopefully will do that tonight. But the highlights seemed promising.

 

After all this selloff it must be getting to somewhere around reasonable value/potentially cheap. I think there may be more downside from here if they get kicked out of the DOW - the flip side of indexing. On the other hand if GE gets the boot, what do you think? BRK in the Dow? Replace one conglomerate with another?

 

TL;DR: $165B market cap with projected FCF of $7B after they do all the gymnastics - 24x p/fcf

 

Longer version from Bloomberg:

 

General Electric Co. may have a new leader, but the pattern of overpromising and underdelivering is the same.

 

Chief Executive Officer John Flannery hosted an investor meeting in New York to lay out his plan for digging the industrial giant out of its current cultural and cash crisis. Nov. 13 had been circled on investors’ calendars for months, and the hype only grew after GE’s dismal earnings report last month.

 

Until now, Flannery had held off on concrete details but said all the right things, promising that “no stone has been left unturned” in an “exhaustive” review. Even as GE’s shares plunged, some investors were hopeful that we might finally see some radical thinking at GE.

 

It wasn’t to be—well, certainly not today.

 

GE kicked off the morning by announcing a 50 percent cut to its quarterly dividend, a major, if necessary, step for a company that prides itself on the payout and caters to a large number of individual investors. Looking at GE’s projected 2018 numbers released just a few hours later, however, it isn’t clear the company cut deep enough. The reduced dividend still will cost about $4 billion annually. And while GE’s targeting $6 billion to $7 billion in industrial free cash flow next year, that’s based on a “cherry-picked definition,” says Cowen & Co.’s Gautam Khanna. The real number appears to be close to zero if you account for pension and capital expenditures as other industrial companies would, he says.

 

This is bad. For one, it means GE’s dividend will still soak up a lot of its cash. Its payout ratio will continue to rank near the top for high-grade industrials. And while the company is aiming to simplify its convoluted reporting metrics, it’s still relying on a number of puts and takes that make it harder to discern the true health of its businesses.

 

And about that “exhaustive” review of GE’s portfolio? It was kind of a dud. Flannery called out GE’s transportation, lighting, and industrial-solutions operations as divestiture candidates. Well, that’s good news, seeing as GE already agreed earlier this year to sell its industrial-solutions business to ABB Ltd. for $2.6 billion. The lighting unit has also reportedly been on the block for quite a while now, and every GE follower had transportation on their divestiture bingo cards. Flannery did mention 10-plus “other” transactions, but those are likely to be small carve-outs within businesses.

 

Flannery is making some long-overdue cultural changes, including reducing GE’s 18-member board to 12 directors, three of whom will be new. But it’s going to take time for this renewed focus on accountability to hit the bottom line, particularly as GE’s power unit continues to slog through slumping demand. And Flannery’s plan for the meantime is in some ways just an echo of what we’d previously heard from his predecessor, Jeff Immelt: asset sales and cost cuts to help the strength of the underlying businesses shine through.

 

It’s now obvious to everyone that Immelt didn’t do particularly well as far as executing on that strategy. If Flannery can do a better job, perhaps that will be enough to stop the stock’s free fall. He, like Immelt, seems convinced that GE’s main businesses all add value and it’s worth keeping them in a conglomerate structure. But they’re increasingly in the minority.

 

Brooke Sutherland, Bloomberg Gadfly

[ourkid8]

We are now under $18...

 

Ouch it's at 18.80 now. This is brutal. I didn't have a chance to go through all the investor day stuff. I hopefully will do that tonight. But the highlights seemed promising.

 

After all this selloff it must be getting to somewhere around reasonable value/potentially cheap. I think there may be more downside from here if they get kicked out of the DOW - the flip side of indexing. On the other hand if GE gets the boot, what do you think? BRK in the Dow? Replace one conglomerate with another?

[Junto]

And going much lower. Momentum is not in favor of the stock and after yesterday, I am not sure what the trigger will be to stabilize it. Metrics are not attractive right now.

[fareastwarriors]

And going much lower. Momentum is not in favor of the stock and after yesterday, I am not sure what the trigger will be to stabilize it. Metrics are not attractive right now.

 

I might bite sub 15...

[Viking]

When I see a company the size of GE fall close to 50% in 12 months (when the market averages are up double digit) it further cements for me how inefficient market prices (stock prices) can be. Has their business really changed that much in the past 12 months that the company should lose more than $150 billion in market cap?

 

Investors oscillate between greed, fear and then greed again and then fear again. Often these swings can take many years or even a decade or longer to play out. From the very little bit that I know, GE looks like a complete train wreck. Lots of red flags, many of which were around for many years. It is in the ‘not interested’ pile for me right now (Given trust management is at or near the top of my list when researching or buying a company).

 

[Broeb22]

Many times, investors get addicted to management’s version of reality, usually in the form of adjusted EPS guidance, or the like.

 

My opinion has always been that these adjusted figures should converge towards FCF. When they don’t, that is a red flag. GE’s FCF has been all over the place, and I don’t know what GE uses, but I know they are famous for coming up with complex adjustments to get to EPS.

 

GE is not obviously cheap to me given their erratic FCF generation.

 

[rb]

Many times, investors get addicted to management’s version of reality, usually in the form of adjusted EPS guidance, or the like.

 

My opinion has always been that these adjusted figures should converge towards FCF. When they don’t, that is a red flag. GE’s FCF has been all over the place, and I don’t know what GE uses, but I know they are famous for coming up with complex adjustments to get to EPS.

 

GE is not obviously cheap to me given their erratic FCF generation.

Not trying to defended the management practices here, but Aviation will do that to you. The are huge deviations between FCF, earnings, and economic earnings in that business. They involve large numbers and take a really long time to converge.

[Spekulatius]

Many times, investors get addicted to management’s version of reality, usually in the form of adjusted EPS guidance, or the like.

 

My opinion has always been that these adjusted figures should converge towards FCF. When they don’t, that is a red flag. GE’s FCF has been all over the place, and I don’t know what GE uses, but I know they are famous for coming up with complex adjustments to get to EPS.

 

GE is not obviously cheap to me given their erratic FCF generation.

 

Rolls Royce has the same issues where business and is growing, but FCF is brakeven or even negative due to huge upfront outlays. Engines lose money when sold, but you later raked it in with service contracts and spare parts. This is like the Razor models, where the handle is sold a t a loss and the razors at a huge profit, except that there handle cost billions to develop and many millions a piece to build. It still a very good business and has a huge moat, just that the  free cash flows are hugely cyclical.

 

Rolls Royce has recovered quite nicely.

Not trying to defended the management practices here, but Aviation will do that to you. The are huge deviations between FCF, earnings, and economic earnings in that business. They involve large numbers and take a really long time to converge.

[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.

[rb]

There has been a lot of arrogance at GE for a long time. Management has always had some holier than thou arrogance. And because they were so awesome they deserved to be showered with money of course.  They spend insane amounts of money at HQ.

 

I'm don't think this is an indictment of the conglomerate as much as it is an indictment of GE. If you look at BRK - a bigger conglomerate - they barely spend anything at HQ. GE probably spends BRKs HQ budget for 10 years just to put out their shitty AR. But if you broke up GE into 3 companies you'll probably just get 3 arrogant and entitled management teams spending like drunken sailors instead of 1.

[Liberty]

There has been a lot of arrogance at GE for a long time. Management has always had some holier than thou arrogance. And because they were so awesome they deserved to be showered with money of course.  They spend insane amounts of money at HQ.

 

I'm don't think this is an indictment of the conglomerate as much as it is an indictment of GE. If you look at BRK - a bigger conglomerate - they barely spend anything at HQ. GE probably spends BRKs HQ budget for 10 years just to put out their shitty AR. But if you broke up GE into 3 companies you'll probably just get 3 arrogant and entitled management teams spending like drunken sailors instead of 1.

 

Of course, you might still get multiple bad companies, but at least it increases the chances that one of those could go in the right direction (luck of the draw, having good management, etc), and if the conglomerate model doesn't add value here, it certainly adds some friction, so removing that would probably help. It could lead to faster decisions, less bureaucracy, more focus (fewer managers moving between divisions to chase promotions and never getting to really know their verticals, etc).

 

Just a thought. Maybe the company is rotten to the bone and can't be saved, I don't know.

 

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...

[clutch]

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.

[rb]

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.