John Buckingham is a leading money manager, best known for his expertise in value investing; he is a...
GE: "So Bad, It's Good"
11/29/2018 5:00 am EST
How the mighty have fallen. General Electric (GE), once the darling of Wall Street, has seen its price drop into the single digit range; the stock hasn't been at these levels since 1990, explains Glenn Rogers, contributing editor to Internet Wealth Builder.
GE was once admired for its brilliant management systems, stable personnel, and promoting from within. Now an outsider manages the company and the executive ranks have been decimated.
The previous longtime CEO, Jeffery Immelt, was finally forced out and replaced by John Flannery before he was shown the door after only 14 months.
Immelt was famous, or infamous, for traveling with two private jets in case one of them broke down. He also made a terrible acquisition of the French power company Alstom for $9.5 billion at exactly the wrong time.
The company eventually took a $22 billion write down which, along with the GE capital division, has been one of the main drivers behind GE's decline. Another disaster was the top of the market acquisition of Baker Hughes, which has crashed along with oil prices over the last few years.
It took a lot of debt to buy all these companies. As a result, GE is the sixth most indebted non-financial company in the world. To further underline the company's problems, the dividend has been cut to a penny a quarter from $0.12 previously.
So yes, it's a mess. So why are we talking about it? Because we are at a point with GE where it's so bad that it's good. Here's why.
The first sign of hope is that it has brought in a highly respected CEO from outside the company for the first time in years, if ever. His name is Larry Culp and he ran Danaher (DHR), a successful industrial company not dissimilar to GE.
Under his leadership, Danaher revenues and market cap quintupled. He joined GE's board only recently but it gave him an opportunity to study the company before he was handed the reins.
The second piece of good news is that GE still has some very decent businesses and, with good financial management, this stock could rally strongly. GE has a prominent position in aviation, making aircraft engines for commercial and military aircraft.
Both areas are booming and have a significant backlog. They also make avionics (aircraft electrical equipment) and intelligent operation services (systems that harvest data).
The company has a large healthcare business, which includes imaging and clinical services. This is a huge business and another sector that is booming and has long-term growth prospects.
The company's transportation business is a supplier to the railroad, mining, and marine industries. GE makes locomotive engines and has a large service and upgrade division that provides steady revenue in slower economic periods.
There are some businesses that could well be trimmed or sold. They include power (including renewable energy), oil and gas, lighting, and GE capital. All these of these divisions have problems and, if GE can get a decent price, watch for some or all of them to be hived off in the next few years.
As well, the company just announced that it has modified the agreement with Baker Hughes (BHGE) to allow GE to sell all or part of its stake earlier than previously agreed. If the company follows through, it may raise some cash from a sale, although the oil market has not been great lately. There have also been rumors about the lighting division being on the block as well.
There are also changes in store for the GE Power division, The company announced that longtime GE veteran John Rice will return to become chairmen of that sector of the business. Rice retired last year so it is likely that he is being brought in to fix up the group so it can be sold later.
Culp is splitting the Power segment into two groups. One will be a unified gas business combining GE's gas product and services groups. The second unit will consist of a portfolio of GE Power's other assets including Steam, Grid Solutions, Nuclear, and Power Conversion.
GE has already sold off its Canadian nuclear services business to BWX Technologies (BWXT). My guess is that the rest of the nuclear part of the Power division is targeted for sale.
The bottom line is that GE has a lot of great businesses but is burdened by some underperformers and a heavy debt load. Now that a competent CEO heads the company, look for all that to change.
The numbers barely matter at this point but for the record the company had third-quarter revenue of nearly $30 billion, EBITDA of $5.48 per share, and net loss of $2.62 per share. With the big dividend cut, the cash flow from this stock is negligible so this is strictly a capital gains play. GE is a buy for patient investors with a time horizon of three years or more.
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