GE - General Electric

[peterHK]

How can a company drop from $250 billion market cap to $85 billion in a little over 2 years (with essentially the same business) and for there not to be some accounting fraud going on. GE is a great example of how untrustworthy financial statements can be.

 

It looks like it will take multiple CEO’s to get the financial reporting corrected to the point where average investors can understand and trust what they are reading. Pretty crazy whar GE was able to get away with for so many years.

 

Do you trust management? Important question to ask before investing in a company.

Is the financial reporting done to help shareholders understand and properly value the business? Important second question to ask.

 

Their financial statements told you everything you needed to know if you did the work. That, and an understanding of the power business, made this a fairly easy short 2 years ago. Base case was basically a company with hideous leverage, increasing leverage to do buybacks, with a deteriorating core business and a culture problem.

 

Closed my short today also. I still think it's expensive but with the Moody's downgrade, the dividend cut etc. they're doing a good job cleaning up all the bad stuff.

 

Finally, all credit to Steve Tusa at JPM on his call on this. He is undoubtedly the best sell side analyst I've ever read work from.

[rb]

Down another 5% today. Is there a bottom for this? At some point it must be at least fairly valued.

[Contra123]

Really want to like this, but it's somewhere between "too hard" and "possible short" for me. Negative tangible book value, pension liabilities, massive debt, and a turnaround plan that is taking place in the 9th year of an economic expansion; if the cycle turns, there is a non-zero probability that the equity is a d0nut, in my view. Would be easier to own this after (if?) they announce further goodco/badco splits.

[Viking]

How can a company drop from $250 billion market cap to $85 billion in a little over 2 years (with essentially the same business) and for there not to be some accounting fraud going on. GE is a great example of how untrustworthy financial statements can be.

 

It looks like it will take multiple CEO’s to get the financial reporting corrected to the point where average investors can understand and trust what they are reading. Pretty crazy whar GE was able to get away with for so many years.

 

Do you trust management? Important question to ask before investing in a company.

Is the financial reporting done to help shareholders understand and properly value the business? Important second question to ask.

 

Their financial statements told you everything you needed to know if you did the work. That, and an understanding of the power business, made this a fairly easy short 2 years ago. Base case was basically a company with hideous leverage, increasing leverage to do buybacks, with a deteriorating core business and a culture problem.

 

Closed my short today also. I still think it's expensive but with the Moody's downgrade, the dividend cut etc. they're doing a good job cleaning up all the bad stuff.

 

Finally, all credit to Steve Tusa at JPM on his call on this. He is undoubtedly the best sell side analyst I've ever read work from.

 

Peter, nice job with GE. Fortunately, i stayed away from GE (and i have never shorted any company). The impulse i have to fight is to buy simply becasue the stock is getting crushed (especially companies that WERE once great). The second impulse is to want to trust management and that they can right the ship.

 

My filter is slowly shifting over the years to focus only on companies with strong business models that are out of favour (stock getting hit) with able management. If the business model is impaired run away. If management looks weak run away. Doesn’t mean money will not be made by some. This approach also helps when times get rough; much easier to hold a strong company with able managment when there is a big price drop (than a shitty company). I think of Buffett’s line that time is the friend of the wonderful business.

 

 

[LongHaul]

How can a company drop from $250 billion market cap to $85 billion in a little over 2 years (with essentially the same business) and for there not to be some accounting fraud going on. GE is a great example of how untrustworthy financial statements can be.

 

It looks like it will take multiple CEO’s to get the financial reporting corrected to the point where average investors can understand and trust what they are reading. Pretty crazy whar GE was able to get away with for so many years.

 

Do you trust management? Important question to ask before investing in a company.

Is the financial reporting done to help shareholders understand and properly value the business? Important second question to ask.

 

Their financial statements told you everything you needed to know if you did the work. That, and an understanding of the power business, made this a fairly easy short 2 years ago. Base case was basically a company with hideous leverage, increasing leverage to do buybacks, with a deteriorating core business and a culture problem.

 

Closed my short today also. I still think it's expensive but with the Moody's downgrade, the dividend cut etc. they're doing a good job cleaning up all the bad stuff.

 

Finally, all credit to Steve Tusa at JPM on his call on this. He is undoubtedly the best sell side analyst I've ever read work from.

 

Nice Call Peter.

 

What do think the real earnings power is at GE?

[rb]

My biggest problem with GE is that I don't understand really their power business or the power sector. There are talking heads on TV that talk about weakness in the power sector that are talking with such conviction about weakness in the power sector as if everyone knows what that means. But a lot of these talking heads cheered GE's purchase of Alstom power business.

 

If anyone can elaborate on GE's power business or the weakness in the power sector please share. I don't care if you preach or talk to me like I'm an idiot. if you have useful information I'm eager to absorb it.

[LongHaul]

My biggest problem with GE is that I don't understand really their power business or the power sector. There are talking heads on TV that talk about weakness in the power sector that are talking with such conviction about weakness in the power sector as if everyone knows what that means. But a lot of these talking heads cheered GE's purchase of Alstom power business.

 

If anyone can elaborate on GE's power business or the weakness in the power sector please share. I don't care if you preach or talk to me like I'm an idiot. if you have useful information I'm eager to absorb it.

 

Rb - I don't understand the power business either.  I could not figure out their accounting for it, as it was made way too complicated.  IIRC GE was booking many years of revenue and expenses for I think it was service work so they may have been front loading profits. I couldn't understand the details though.  They did not want people to understand them in my opinion.

 

 

 

 

 

[peterHK]

How can a company drop from $250 billion market cap to $85 billion in a little over 2 years (with essentially the same business) and for there not to be some accounting fraud going on. GE is a great example of how untrustworthy financial statements can be.

 

It looks like it will take multiple CEO’s to get the financial reporting corrected to the point where average investors can understand and trust what they are reading. Pretty crazy whar GE was able to get away with for so many years.

 

Do you trust management? Important question to ask before investing in a company.

Is the financial reporting done to help shareholders understand and properly value the business? Important second question to ask.

 

Their financial statements told you everything you needed to know if you did the work. That, and an understanding of the power business, made this a fairly easy short 2 years ago. Base case was basically a company with hideous leverage, increasing leverage to do buybacks, with a deteriorating core business and a culture problem.

 

Closed my short today also. I still think it's expensive but with the Moody's downgrade, the dividend cut etc. they're doing a good job cleaning up all the bad stuff.

 

Finally, all credit to Steve Tusa at JPM on his call on this. He is undoubtedly the best sell side analyst I've ever read work from.

 

Nice Call Peter.

 

What do think the real earnings power is at GE?

 

I don't think anyone really knows for sure, but I'd say look at their cash flow (their EPS number is total crap). Run rate FCF is about $5bn for their industrial businesses, but they're divesting things to basically fund their pension, so ex those divestitures it's about $3.3bn in FCFE.

 

GECS loses money at higher interest rates, so that's actually a drag on the $3.3bn.

 

Against that you have $100bn of liabilities.

 

It's not pretty. Once they get rid of GECS (and I suspect they're liquidating the good things first, so that may be a further drag in the near term).

 

I would recommend reading the interview with Tusa here: http://www.grahamanddoddsville.net/ in the fall 2018 edition.

 

On the 5bn currently (pre divestiture) at a 15x multiple, you get $75bn in market cap, closeish to where we trade today.

[LongHaul]

thx for the response.    This is a tough one. 

 

 

[walkie518]

anyone have a feel how the och-ziff relationship is panning out? 

 

how much is GE losing as a result of letting oz manage planes?

[rb]

Does anybody have Steve Tusa's report or knows where I can get it?

[Cigarbutt]

Does anybody have Steve Tusa's report or knows where I can get it?

Disclosure: Have followed GE over the years but only superficially.

Looked into this (stocks going down have this effect on me) after reading the article in Graham & Doddsville issue referred to above in the thread.

https://www8.gsb.columbia.edu/valueinvesting/sites/valueinvesting/files/Graham%20%26%20Doddsville_Issue%2034_v22.pdf

I understand there were several ongoing reports with a total over 1500 pages apparently.

There is a 2017 Barron's article "The case against GE" that may be of interest to you.

 

I also found the following to be useful:

http://www.valuewalk.com/wp-content/uploads/2017/09/GE-Framework-Valuation-vs-JP-Morgan.pdf

 

The work that Mr. Tusa did appears to be convincing but, reviewing this retrospectively, I was wondering how difficult it must have been to separate an impression of a true insight versus the inevitable "endowment" effect with all the work and effort put into this. In the G & D issue, Mr. Tusa explains well the feeling that occurs at the moment that you realize you were right (the "this is it moment"). The kind of feeling you know will produce lasting satisfaction.

 

Would like to read your opinion about when this falling knife will stop falling.

[rb]

Yea I've read the Barron's article and the Columbia interview. But at this point I'm passed reading interviews and summaries. I'd like to get into the weeds. That's why I want to see the big research report.

 

I'm actively working on this. Which keeps giving me headaches btw. But if I develop something of value I'll be sure to post. I'll just re iterate my request that if anyone has the Tusa report, please let me know.

[LightWhale]

Yea I've read the Barron's article and the Columbia interview. But at this point I'm passed reading interviews and summaries. I'd like to get into the weeds. That's why I want to see the big research report.

 

I'm actively working on this. Which keeps giving me headaches btw. But if I develop something of value I'll be sure to post. I'll just re iterate my request that if anyone has the Tusa report, please let me know.

 

The server does not allow attaching the report due to its size. Send me your address and i'll email it to you

[rb]

Send it to raiocompcan@hotmail.com.

 

Many thanks for this!

[LightWhale]

Sent

[BeerBBQ]

What is Tusa's FCF estimate?

[maxthetrade]

General Electric (GE) PT Lowered to $6 at JPMorgan

JPMorgan analyst Stephen Tusa lowered the price target on General Electric (NYSE: GE) to $6.00 (from $10.00) while maintaining an Underweight rating.

"“RBC” of $100 B in Liabilities/Zero FCF Intact As Focus Shifts From DBS to GEBS (Balance Sheet)," Tusa wrote.

 

[peterHK]

Looks like I bailed on the short too early!

[ValueMaven]

I am long in the mid-$11s...small position; although I added yday - either 1) He has a mole inside GE feeding him this info; b/c of the level of analysis is very deep, or 2) This will rip against him over the next 18-24 months.  I am betting w/management here at this point...there are a  lot of levers to pull here at this point..amazing the differences in price targets.  BTW even a rally back to $13 would be a 45% return at this point!!

 

Culp is keeping his mouth shut and is focused on executing...I like that

 

BTW: Trian must be getting SMOKED in this name...

[peterHK]

I am long in the mid-$11s...small position; although I added yday - either 1) He has a mole inside GE feeding him this info; b/c of the level of analysis is very deep, or 2) This will rip against him over the next 18-24 months.  I am betting w/management here at this point...there are a  lot of levers to pull here at this point..amazing the differences in price targets.  BTW even a rally back to $13 would be a 45% return at this point!!

 

Culp is keeping his mouth shut and is focused on executing...I like that

 

BTW: Trian must be getting SMOKED in this name...

 

He doesn't have a mole, he just has done his work. Remember that he couldn't publish on it for a year, but he spent that year learning everything he could.

 

How do you even get to $13? On $3bn of FCF at a 15x multiple, I can't get anywhere near that figure. Also, why would you take that risk when there are so many other easier pitches to swing at than this?

[txvalue]

Peter - what do you value GE Aviation at? It seems even GE bears think this is a solid business. It is also quite a large one, seperated out from the parent it would be a S&P 500 company.

 

Often with black boxes people misestimate the value (both upside and downside) and valuing at a multiple of FCF may not make sense when there is something (or in this case several things) that is massively underperforming and dragging down the rest.

 

Using your 15x for aviation it is a standalone $75-85 billion company looking at 2017 numbers.

[kab60]

This situation is way too complicated for a simpleton like me, but considering the crazy big corporate HQ which is both expensive and inefficient in that noone knows what they're responsible for (so they don't take responsibility) - I'd think there are huge potential costs to take out. Take that with a grain of salt since it's mostly based on my reading and no number crunching (but if you have 2 CEO jets what else have they built up over some 30 years?). That, and the fact that a flatter, more decentralized organisation seems to be on its way, makes it interesting to follow.

[Contra123]

Out of curiosity, what downside protection do you feel there is here? You have a troubled industrial business with a ton of debt and pension obligations ranking ahead of the equity, in a 9th year of GDP expansion. How do you handicap the probability of equity ending up out of the money (or heavily diluted) if macro worsens?

[rb]

Not peter, but here's my take. Valuation for Aviation is probably north of $70 billion.

 

There are problems though. You can't really separate Aviation from Power because there are big synergies between the two. So they'll probably always stick together. Also Aviation goes through some big cash flow cycles. First you sell really expensive engines at a loss - bleeding cash. Then you rip your customers eyes out on parts - getting lots of cash. Aviation is at the point in the cycle where they're selling lots of engines. In fact looking at their sales mix their cash flow is actually too big and will likely drop.

 

This sort of business is a natural fit somewhere in a conglomerate where it can be fed cash when it needs it by other parts of the business. So it would fit well in a place like GE where Power would feed Aviation. But you get a worst case scenario though when Power is starving and Aviation is hungry. I guess Aviation could be stand alone but it would be more valuable to a conglomerate with lots of FCF like Berkshire than stand alone.