Streetwise for Sunday, November 12, 2017
Nothing worthwhile in life comes easy and investment success is no exception. Yes, Wall Street can be a rose garden but only if you avoid the ever-present thorns. One way of doing so is to maintain a firm belief that you invest in a company because, and only because, you are totally on board with what a company is trying to accomplish and how it plans to get there.
You must be convinced, beyond any doubt, that a combination of products, market potential and on-going management strength is present in a synergistic combination that will yield a continuing increase in revenues, earnings, and dividends. General Electric (GE) does not, in my opinion, meet that requirement.
A year ago, General Electric was a $260 billion industrial giant emerging from a major streamlining effort with high hopes of becoming a top 10 software company. Now, it’s a $175 billion cautionary tale of bad management facing a major decline in earnings expectations.
The day Jeff Immelt took over as General Electric’s CEO, shares of the company were trading about $40. Today they are worth about half that. Add in the speculation that a cash crunch could force a dividend cut.
Moreover, there are at least two law firms looking to institute class action suits over the issue that General Electric misled investors and regulators as to its financial well-being.
As has been the case for other large, well-known companies, General Electric has received a proverbial “Get out of jail,” card simply because it is General Electric. The company can trace its roots to Thomas Edison and is the only original member of the Dow Jones Industrial Average still in the index.
Someone must answer for General Electric’s performance debacle and Jeff Immelt, the former CEO, is first in line. Immelt’s energy and power acquisitions were done just as those markets slid downward.
Steve Bolze, former head of General Electric’s power unit and once a top contender to succeed Immelt, failed to grasp the magnitude of the weakening demand.
Jeff Bornstein, General Electric’s former chief financial officer, joined with Immelt when it came to overly optimistic financial forecasts. Bornstein admitted responsibility, however his “falling-on-the-sword” rhetoric is not mollifying shareholders.
Meanwhile, John Flannery, General Electric’ current CEO, is weighing options for the company’s aircraft leasing operations, General Electric Capital Aviation Services (GECAS), including the sale of all or part of the business, as he searches for $20 billion of possible divestures.
GECAS has a fleet of roughly 1,300 planes worth an estimated $25 billion, ranking behind only AerCap Holdings, which is estimated to have a $30 billion portfolio, according to data from industry consultancy Ascend Flightglobal. AerCap has a market capitalization of $8.3 billion.
Sensing a possible sale, GECAS is seeing buying interest from its competitors. The move comes at a time when massive Chinese funding is shaping the $260 billion aircraft leasing industry to become a significant new asset class. One reason is that approximately 40 percent of the airline industry’s aircraft is leased to avoid the fixed costs of owning aircraft.
General Electric has also been exploring divesting its transportation and healthcare information technology businesses. And the recently announced Baker Hughes stock buyback is unlikely to be any kind of a savior for General Electric.
General Electric owns a 62.5 percent stake in Baker Hughes (BHGE) and does not plan to dilute its holding. Over time, General Electric will receive $2 billion or more in hard cash, depending in part on BHGE’s future share price.
Buy ratings on General Electric’s shares are common, even as the outlook for General Electric continues to deteriorate. And while many analysts continue to be positive on the outlook for the shares. I am not.
The intrinsic value of the company’s shares using the ValuePro.net free cash flow to the firm model is about $4.00 per share, which about where I would value them.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.