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Can GE turn around its Blues?

Tuesday, April 24th, 2018

Last year I wrote an article detailing GE’s troubles and tracking how the mighty had fallen. The sense of owning a blue-chip company led investors to ignore the high valuations and the high payout ratio. As a reminder, the company was using nearly 110% of its earnings to pay out its dividend. While the dividend yield was over 4% before the cut, the company did not have the earnings or cash flow to sustain the dividend and the payment was cut in half. This led to many income investors to leave the stock and the share price continued to fall.

I wanted to follow up on my previous article to check where the company’s fundamentals currently are and if it has potential moving forward. It is important to remember that simply because a stock price falls does not translate into being a good value. Based on my prior analysis, when the stock was near $17.00, I mentioned I may become intrigued if the stock price fell to around $13/share.

While we know the company name, I believe it is important to take a closer look at the businesses the company is involved in. General Electric’s services power generation, oil & gas, renewable energy, aviation, healthcare, transportation, energy connections & lighting, as well as its own financial services division. One of the issues I believe was part of GE’s troubles was the company has been spread too thin into businesses that had little correlation. Before investing into this business, I would want to know more about John Flannery’s, GE’s CEO, plans and which businesses he is planning on keeping and which businesses he is planning on selling.

General Electric currently has a stock price of $14.68 and its 52-week range is $12.73-$29.93.

While it does look like a pullback may have made this company more attractive, it is always important to check the fundamentals before investing.

Over the last 12 months the company has had no earnings, so the P/E multiple is not material. Price/Sales of 1.0 is attractive compared to an industry average of 2.1, but Price/Cash Flow of 64.3 is very expensive compared to the industry average of 17.4. It does not surprise me that the company does not have a Price/Tangible Book value considering the companies acquisitions over the years and the climb in goodwill. The total goodwill and intangibles on the balance sheet of $126.9 billion far exceeds the company’s current equity of $56 billion. This could become problematic if GE sells businesses at a loss as it would be forced to write down its goodwill, which would reduce shareholder equity.

With the continued fall in the stock price, investors do get a good dividend of 3.3%. With no earnings over the last 12 months there is no dividend payout ratio. If GE continues to see cash flow and earnings troubles the dividend could again be cut.

The growth rates also look troublesome with sales only increasing 0.3% over the last 12 months and EPS sliding by 135.7%. Much of the earnings troubles can likely be attributed to reorganizations and other company specific problems.

The Debt/Equity of 224.6% looks concerning, but the balance sheet is more challenging to understand than other companies due to the financial aspect. When holding companies such as this, I like to distinguish the two and look at the debt level of the non-financial businesses and get a better understanding of the financial business. If the non-financial businesses carry high debt burdens, I would likely avoid the company all together.

Looking out to December 2019, estimated GAAP EPS of $0.90 would give me a target sell price of $14.85. Based on the forward multiple, I would now not be interested in this company until it was around $11/share. To be honest, I don’t even think that level would attract me given the complexities of the business. Warren Buffet is famous for telling investors to buy what they know. It is important to distinguish recognizing the company’s brand and truly knowing the business. The complexities of the business make it very difficult to know in detail how this business operates.

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