GE - General Electric

[ValueMaven]

Interesting that this has died down recently; particularly 1) in light of the stock going below $13 per share, and 2) rumors yesterday of possibly Berkshire buying a stake...

 

Sincerely,

VM

[DTEJD1997]

Interesting that this has died down recently; particularly 1) in light of the stock going below $13 per share, and 2) rumors yesterday of possibly Berkshire buying a stake...

 

Sincerely,

VM

I would be willing to wager that Berkshire is NOT going to take a steak in GE.  Make no mistake, this is a BIGLY turn around situation.  Berkshire does not do "turn around" situations.  The nearest they come to that is making preferred loans to get a company through a tight/specific situation.

 

A loan or dollop of cash is not going to help GE out of it's current mess.  They need STRONG MANAGEMENT.  They need to make some money, pare down debt, beef up the pensions, come out with new/better products...a complete reworking.

 

GE also faces a risk of being booted from the DJIA. 

 

They also face a bankruptcy risk if the economy turns down.  I think this thing is levered more than most people think.

 

Then you've got the problems with the goofy stories of waste & abuse.

 

Of course, GE could turn around with a couple of years of hard work & belt tightening...but if I were to bet, I'm guessing GE is facing trouble ahead.

[ValueMaven]

Interesting to note that Prem and FFH commented on GE in their 2017 annual letter!

 

'We continue to like the long term prospects of our common stock holdings, which include names like General

Motors, General Electric and US Gypsum, all of which should benefit from robust economic growth in the U.S. and

are currently very reasonably priced.'

 

 

[sleepydragon]

still possible Web could make a preferred stock investment or buy an asset from GE's hand.

 

Interesting that this has died down recently; particularly 1) in light of the stock going below $13 per share, and 2) rumors yesterday of possibly Berkshire buying a stake...

 

Sincerely,

VM

I would be willing to wager that Berkshire is NOT going to take a steak in GE.  Make no mistake, this is a BIGLY turn around situation.  Berkshire does not do "turn around" situations.  The nearest they come to that is making preferred loans to get a company through a tight/specific situation.

 

A loan or dollop of cash is not going to help GE out of it's current mess.  They need STRONG MANAGEMENT.  They need to make some money, pare down debt, beef up the pensions, come out with new/better products...a complete reworking.

 

GE also faces a risk of being booted from the DJIA. 

 

They also face a bankruptcy risk if the economy turns down.  I think this thing is levered more than most people think.

 

Then you've got the problems with the goofy stories of waste & abuse.

 

Of course, GE could turn around with a couple of years of hard work & belt tightening...but if I were to bet, I'm guessing GE is facing trouble ahead.

[Broeb22]

Seems like a positive thing Larry Culp, former CEO of Danaher, will become lead director. A good soft indication that GE is serious about operating efficiently.

 

[Spekulatius]

Seems like a positive thing Larry Culp, former CEO of Danaher, will become lead director. A good soft indication that GE is serious about operating efficiently.

 

I don’t think that GE is operating that inefficiently. The main thing seems to be the large corporate cost, of which there is less and less justification, now that many divisions are sold off and the whole conglomerate is shrinking.

[TwoCitiesCapital]

Crazy to me that you can hide a dividend cut in the news of a spin-off and your stock go up by 8%....

 

I was getting interested if it started below $12, but $12 still remains the highest I'd be willing to pay for it as is. I think simplification is good, though it's hard to see the immediate benefit of jettisoning a stable business w/ stable cash flows and announcing the sale of an oil services company while it's near its cycle lows...

 

Something in me believes that the news was mostly to disguise the dividend cut while giving critics what they wanted - a smaller company, not necessarily a better company.

 

 

 

 

[rb]

I'll echo what TwoCities said, but I don't think he goes far enough. This is all just old GE financial engineering bullshit. These guys just don't get it. They don't have a "we're too big problem" they have a hole in the balance sheet problem.

 

The decision to spin off Healthcare is breathtakingly stupid. Why spinoff? Why not just just sell it to a PE shop? You'd get top dollar for that today and use the funds to plug your balance sheet. Then move on from there and do better. Aviation is going to need to eat cash to roll down its growth runway. Power isn't going to provide that cash given its current state. After getting rid of BHGE and Healthcare they'll have nothing meaningful left to sell.

 

I think in the end they'll have to do a capital raise at a depressed valuation which will be hugely value destructive. I'm glad I didn't pull the trigger on this one. It'll be a disaster. What a bunch of tools.

 

Last thought.... Why can't they spin off Aviation so I can just buy that business without all the idiots at GE in tow?

 

[Broeb22]

Seems like a positive thing Larry Culp, former CEO of Danaher, will become lead director. A good soft indication that GE is serious about operating efficiently.

 

I don’t think that GE is operating that inefficiently. The main thing seems to be the large corporate cost, of which there is less and less justification, now that many divisions are sold off and the whole conglomerate is shrinking.

 

I agreed with you before reading this piece that put several pieces together. GE purchased business after business at cyclical peaks, and Immelt according to this article believed GE's high performance culture would sustain itself. Given the comedy of errors described here, I think a voice from one of the best-run companies in the world at the board level should be a good thing.

 

http://fortune.com/longform/ge-decline-what-the-hell-happened/

[peterHK]

Glad rb and TwoCities have this right.

 

GE is a mess, and frankly a case study of the post Welch period would be a fantastic book. The culture at GE is rotten (IMO Welch was largely successful through earnings manipulation), the company had no capital allocation strategy except one of stupidity.

 

Also agree that this shuffle is stupid. As rb pointed out, this is a balance sheet issue, and this move doesn't fix the balance sheet. I see no way for this to play out except a dividend cut and a capital raise, and for that reason I remain short.

[benchmark]

Glad rb and TwoCities have this right.

 

GE is a mess, and frankly a case study of the post Welch period would be a fantastic book. The culture at GE is rotten (IMO Welch was largely successful through earnings manipulation), the company had no capital allocation strategy except one of stupidity.

 

Also agree that this shuffle is stupid. As rb pointed out, this is a balance sheet issue, and this move doesn't fix the balance sheet. I see no way for this to play out except a dividend cut and a capital raise, and for that reason I remain short.

Curious of the mechanism of your shorting?

[Spekulatius]

Crazy to me that you can hide a dividend cut in the news of a spin-off and your stock go up by 8%....

 

I was getting interested if it started below $12, but $12 still remains the highest I'd be willing to pay for it as is. I think simplification is good, though it's hard to see the immediate benefit of jettisoning a stable business w/ stable cash flows and announcing the sale of an oil services company while it's near its cycle lows...

 

Something in me believes that the news was mostly to disguise the dividend cut while giving critics what they wanted - a smaller company, not necessarily a better company.

I think BHGE is some sold, because the profitability very likely will be subpar over the cycle. They kind of made the mistake to spin it hem off the with a pristine balance sheet, which of course meant that the GE core was stuck with the debt.

 

The health care business does generate strong FCF, so selling that one left me scratching my head. I think this is just an elaborate shuffle to cut the dividend in a not so obvious way  -  or in other other words more financial engineering.

 

I think doing some convertible deal or a direct secondary would have been a more straightforward approach, but of course doing so would have been a huge embarrassment.

[rb]

Crazy to me that you can hide a dividend cut in the news of a spin-off and your stock go up by 8%....

 

I was getting interested if it started below $12, but $12 still remains the highest I'd be willing to pay for it as is. I think simplification is good, though it's hard to see the immediate benefit of jettisoning a stable business w/ stable cash flows and announcing the sale of an oil services company while it's near its cycle lows...

 

Something in me believes that the news was mostly to disguise the dividend cut while giving critics what they wanted - a smaller company, not necessarily a better company.

I think BHGE is some sold, because the profitability very likely will be subpar over the cycle. They kind of made the mistake to spin it hem off the with a pristine balance sheet, which of course meant that the GE core was stuck with the debt.

 

The health care business does generate strong FCF, so selling that one left me scratching my head. I think this is just an elaborate shuffle to cut the dividend in a not so obvious way  -  or in other other words more financial engineering.

 

I think doing some convertible deal or a direct secondary would have been a more straightforward approach, but of course doing so would have been a huge embarrassment.

You've missed the big piece of this. They're not selling Health Care. They're spinning it off. So they'll miss out on the cash provided by health care and get no cash in return.

 

They're not doing anything about the problem. They're just trying to weave a story of a smaller, focused GE and try to sell that to the market hoping that will make their problems go away. Basically same old MO. We're basically approaching peak moron here.

[dwy000]

Arent they spinning off 80% and selling the rest for cash?  We'll have to wait and see how much debt and pension obligation they stuff into it before spinning.  The cash received from the 20% (plus cash from sale of Baker Hughes and the other businesses being sold) should clean up a good portion of the balance sheet issues.  You would imagine that a 100% sale of Healthcare to private equity or someone else would have had huge cash tax impact. 

 

 

If they're going to sell a business Healthcare makes a lot of sense.  Aviation is the crown jewel while Power is at depth of the cycle.  Plus both of those would have limited buyers without running into gov't approval issues.

 

 

The bigger question in my mind is what the businesses look like once they stuff all those corporate costs back into the businesses.  Those were supposed to be shared services and the like.  Not sure how it makes more sense to run multiple versions within the businesses than as a center of excellence across all businesses.

 

[peterHK]

Arent they spinning off 80% and selling the rest for cash?  We'll have to wait and see how much debt and pension obligation they stuff into it before spinning.  The cash received from the 20% (plus cash from sale of Baker Hughes and the other businesses being sold) should clean up a good portion of the balance sheet issues.  You would imagine that a 100% sale of Healthcare to private equity or someone else would have had huge cash tax impact. 

 

 

If they're going to sell a business Healthcare makes a lot of sense.  Aviation is the crown jewel while Power is at depth of the cycle.  Plus both of those would have limited buyers without running into gov't approval issues.

 

 

The bigger question in my mind is what the businesses look like once they stuff all those corporate costs back into the businesses.  Those were supposed to be shared services and the like.  Not sure how it makes more sense to run multiple versions within the businesses than as a center of excellence across all businesses.

 

If you sell 20% of a business in a spin, and retain 80%, and then shove a bunch of pension obligations and debt in it, you still own 80% of that crappy capital structure. It in no way fixes the BS issue, nor really does selling BHGE .

 

Frankly, selling anything is bad because everyone knows GE has to. They, aside from raising ~$60bn of equity to get to 2.5x net debt to EBITDA, which is where peers trade, have no other options, so any buyer is going to take them to the woodshed relative to what they'd get if they didn't have this cap structure issue.

 

As for how I'm short, I'm short via Dec 2018 puts which I've been in since June of last year when I first read Tusa's reports from JPM. He's had this 100% right since the beginning and is probably the best analyst out there today for industrials

 

 

[dwy000]

They're not retaining 80%.  They're handing 80% to existing GE shareholders and selling the remaining 20% for cash. All the existing GE keeps is the cash.  The spun out business will likely take a good chunk of the debt, pension obligations and dividend with them.  The remaining GE will reduce the dividend (likely), sell off Baker Hughes for cash and have a more manageable balance sheet going forward.  As a shareholder you have more flexibility because you can choose to keep or sell the new Healthcare stock or the remaining GE stock.

 

I get the argument that this business is struggling and I question how much upside there is but from $13/share I'm not sure I see the risk/reward in playing it as a short from here.  From $25-30, absolutely, but from $13 with a dividend for the next 18 months?  That's a tough trade.  Good luck!

 

[topofeaturellc]

Look at the multiple Healthineers gets and you realize how much liabilities you can put into the Ge healthcare spinco and still be happy.

 

It's pure financial engineering but it benefits remain co equity holders.

 

Tusa's 60 bn number is kind of naive math and elides a lot of other things.  That's said I'm not sure this thing is damn the torpedoes cheap.

 

BTW you know his whole thesis originated with the European guy at JPM who actually probably is the best industrials guy around.

[peterHK]

They're not retaining 80%.  They're handing 80% to existing GE shareholders and selling the remaining 20% for cash. All the existing GE keeps is the cash.  The spun out business will likely take a good chunk of the debt, pension obligations and dividend with them.  The remaining GE will reduce the dividend (likely), sell off Baker Hughes for cash and have a more manageable balance sheet going forward.  As a shareholder you have more flexibility because you can choose to keep or sell the new Healthcare stock or the remaining GE stock.

 

I get the argument that this business is struggling and I question how much upside there is but from $13/share I'm not sure I see the risk/reward in playing it as a short from here.  From $25-30, absolutely, but from $13 with a dividend for the next 18 months?  That's a tough trade.  Good luck!

 

You as a shareholder still own 80% of a crap capital structure unless you choose to sell. This doesn't fix the problem at remainco , it only allows shareholders to bail out of some of the business.

 

I see the upside from $13 partially due to it being a good hedge against a downturn economically. GE is so leveraged, reliant on capital markets to fix it, and its businesses are weak that if we got a surprise downturn (not necessarily a recession, just a reduction in growth) from trade wars/EM reduction in growth/China issues etc. I think it would fall hard.

[IanBezek]

New lows here. Pretty incredible to watch - still don't see anything compelling me to think the trend is about to change though.

[walkie518]

New lows here. Pretty incredible to watch - still don't see anything compelling me to think the trend is about to change though.

I would agree

 

perhaps at this point, mgmt should consider cutting dividend to $0

 

Wabtec deal looks good for Wabtec and less so for GE?

https://www.sec.gov/Archives/edgar/data/40545/000114036118038521/s002382x5_425.htm

[Liberty]

GE: -15% CAGR over the past 5 years

 

Not bad, but amateur hour compared to SHLD at -55% CAGR over 5 years...

[Spekulatius]

Sad, but true GEmisntneven cheap after losing so much of its market cap.  You can buy a fairly comparable company SIEGY for basically the same valuation, but without any of the headaches.

[John Hjorth]

GE: -15% CAGR over the past 5 years

 

Not bad, but amateur hour compared to SHLD at -55% CAGR over 5 years...

 

No sweat - just try mentally to have bought a tracker [commision free] on August 25^th 2016 at 31.22. Please just ask me to elaborate, if you want a good laugh.

[rb]

Sad, but true GEmisntneven cheap after losing so much of its market cap.  You can buy a fairly comparable company SIEGY for basically the same valuation, but without any of the headaches.

Not quite. Siemens lacks an incredibly good aviation division.

[Spekulatius]

Sad, but true GEmisntneven cheap after losing so much of its market cap.  You can buy a fairly comparable company SIEGY for basically the same valuation, but without any of the headaches.

Not quite. Siemens lacks an incredibly good aviation division.

 

I know  . they don’t have an aviation unit, but they do have. power unit (struggling too), a health care unit (partly spun off) and a very good automation and software business with annuity like attributes. While the engine aviation is a good business, it does have a significant drawback of undergoing multiyear ebbs and flows in FCF, which right for GE is inconviently is in an ebb cycle.