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The definition of a conglomerate, GE offers everything from light bulbs to power plants, jet engines to water processing, financial services to 30 Rock.
if the 31 cent dividend is ever reinstated, it will put this at a > 8% yield. upside to 30 is more likely than downside to 7.5. I guess this is a bet that eventually that dividend will come back. Jeff Immelt says GE capital is shrunken down and under control. Would anyone not agree with me that this is a very safe bet that this will at least double in 5 years? Stimulus still hasn't hit yet and smart grid will be huge.
I can't agree more. I'm long GE for the last 3 months. I'm excited about the recent dips because of the opportunity to buy cheap. Latest play - short Oct 15 puts. GE is diversified, well managed and positioned to move. GE Cap is the biggest risk, but in light of everything else, I really like the stock.
If you look closely at GE's debt load, I believe it will be bankrupted in the next several years. NO ONE can manage a company out of $300 billion long-term debt load based on less than a consistent earnings of $20 billion net income. In other words, it would take the company over 20 years to pay off it's debt using its' earnings on nothing else. Please also understand that the company owes over $120 in Retained earnings. That's a total of almost half a trillion dollars.While GE has severed it's mortgage based financial instruments, who knows how many weapons of mass destruction like leveraged buy-out bonds, credit default swaps, etc. they have in their portfolio of debt. Good luck finding out. They may sell their media vehicle but that only accounts for less than 10% of their revenue while their financial arm accounts for more than 1/3 of their revenue alone. Who would buy their financial company?GE is like GM. GM was selling somewhere around $40 a share before it imploded. Those in the know saw the price of steel being massively artificially inflated when the Chinese where building their Olympic site. Something as simple as this is what I believe was the straw that broke the Camel's back. GE's back is weak and God only knows what will bring it down.I believe the stock may meander for a few years but the way it is structured now, it has no chance as a valuable asset in the long term.
johngg123,I just closed my position out of GE for now. I think we are going to have a fairly large market correction in all the markets and since GE is a DOW component and a Global company, the stock may fall as much as 40%. I plan on buying on the drop in increments. So for every 10% drop I would buy stock. I also think they have more de-leveraging to go on the GE capital division. However your comment about smart grid being huge and GE getting a large part of that business is now a fact. Several utilities just announced that they have selected GE for their provider of smart grid components and GE is receiving some of the stimulus money directly. I would have included references to the actual articles but it's morning in Iraq and I am not quite awake yet! ;)Let me know what you or any others think about my evaluation of GE and my planned purchases.
Some excellent points on the debt load GE is carrying. However I would hesitate to write them off based on their Debt to Income numbers. GE is not like GM in that they are not in one industry and stuck in a 1960's business model with a management team that demonstrated they were completely disconnected from their customers, their industry, market forces, public and government opinion and outrage at their inability to compete with Toyota, Honda, etc.GE is a more more diverse company that is profitable, innovative, marketing savvy in all segments except the Financial and Media business. They are selling NBC because their management team has correctly evaluated the decline of both the broadcast t.v. medium and it's advertising revenues in the face of competition from the Cable Television, Internet and Wireless mediums.I believe they will eventually straighten out the GE Capital division but it's going to take time. 10 years at least before we will see if they can become profitable or if they simply cut back on the financial division and let the debt unwind.In the mean time I have sold my position and plan on buying back in on the market corrections that are now occurring. I figure even if it goes down to my bottom of 40% current price, I can buy on every 10% drop in price and be in a long position to profit from their Alternative Energy, Locomotive, Smart Grid and Engineering segments growth.
I like your comment on debt load, but I find a correlation to our country. If the debt load we are carrying as a country is so huge, what makes our ability to get out of this mess any better than GE's? LOL
A company...and a country can carry a sizable debt load as long as there is cashflow to keep making the payments. GE is a cash generating machine (no comments about the country!).....and its Oil & Gas, Energy, Infrastructure, Aviation, etc. units are not only profitable, but growing in this stagnant or deflating economy. Assests in GE Capital have been written down...and will likely need to be written down more, but they are not worthless and will rebound. I own many shares at an average cost of $15.5 and I plan on holding on.
TheGolden13,You are correct that MOST companies cannot manage a $300B long term debt, but to say that GE cannot shows a profound misunderstanding of how GE's businesses operate. A high percentage of the long term debt comes from their financial services. Luckily, GE shows GECS (GE Capital Services) and GE "regular" (Infra, Water, Power, Media, etc) separately on their 10-Q and 10-K forms, so for this discussion I will be referencing those documents. If you look at page 5 of the 10-Q for Q3-2009, you will see that 347B out of the 358B in debt comes from GECS, this leaves 11B in debt for the core businesses, I think we agree that 11B for those businesses is very manageable, so I will not discuss that part further. The pieces that everyone is scared about is the GECS component. To understand this you need to understand how GECS operates.Essentially what GECS does is borrow from banks at a favorable rate (for the sake of argument we will say 2%; however, this is just for illustration, I don't know the exact numbers) and then they lend this money out at 3% (again, #s just for illustration). GECS does a LOT of volume with these deals and that is the primary revenue for them. Therefore, any debt that you see from GECS you would expect to see in the accounts receivable for them. When/If accounts receivables becomes lower than debt you have a bad situation for GECS. Since GECS receivables are 348.5B, we have not reached that point yet.Now that we have a basic understanding of GECS we can discuss some of the problems. One of the major problems GECS faced was losing the AAA credit rating. Why is this important? GECS makes their money from borrowing cheap and lending higher. Theoretically, when your credit rating goes down, your rates go up. This means less profit for GECS; however, even when they were rated AAA they were still receiving rates more typical of a AA or AA+ company, so being downgraded ultimately didn't have as much effect as it could have.The second problem we can discuss is the problem that would be faced if GECS receivables become less than GECS Long Term Debt. Essentially what happens now is that GECS will get payments from entities that borrowed from GECS. GECS then takes part of this payment as profit and sends the rest back to the banks that GECS borrowed the original money from. If a GECS borrower defaults on their loan, then GECS would not have the money to send back to their lending banks. Thankfully for GECS, if this scenario ever occurred they have the backing of the rest of the GE businesses (and this is the main reason that GE's credit rating is still so high). This would still obviously be a bad situation, but it is still a VERY far cry from bankruptcy unless they have a MASSIVE amount of defaults (which is not at all likely).Hopefully this helps everyone understand a little better. Feel free to post some questions if you have any and I can do my best to answer them.As for the original post, I think you have a good strategy. I think GE long term is a good bet. I won't venture a guess on how long or how high, but I definitely don't see myself regretting a buy right now.
Thanks for the very thorough explanation and accounting analysis MikeGi--I think most people will find it very easy to understand. Your comment falls very much in-line with how I've been feeling about GE on a risk/reward basis since much earlier this year. What do you think GE should do to improve its financial arm? Simply make much less riskier loans going forward, or gradually curtail that business and focus on its infrastructure and tech segments?The only reason I find this question somewhat difficult to reconcile myself, is the fact that as you said, it is such a lucrative and simple way for GE to bring in a massive amount of revenue.
MoneyWorks,That is a tough question. I'm not sure how I would answer it, but it looks like GE is deciding to just reduce the amount of business they do in their GECS division. They haven't really made a considerable amount of bad loans (they stand out of the CDS game which turned out to be very smart). They are struggling with their commercial portfolio right now, but it doesn't seem to be a huge issue yet.Basically what GE has said is that they know they are really good at infra/tech stuff (they think they are the best), but they aren't sure about Capital. They think they are good, but not great. So they have said they want to focus on infra/industrial since they know they can perform there. This is also the reason you see them selling a major stake in NBC as well as trying to offload their consumer division. They still want to find a way to make Capital work, but it seems that they aren't sure how.You are right that it is hard for them to just walk away from that easy money. In 2008 they made somewhere around $8B from GECS. I think the 2009 number is closer to $2 or $3B.Hope that helps
MikeGi - awesome input! I own some GE, but I have been thinking of selling (had some for years, bought much more at $8/shr). To me the big X-factor for GE is GECS. First, many believe corporate debt defaults are just beginning. I don't think too many were surprised to see CIT go down (as a rule, I don't short stocks, but that was the most tempting short since WAMU). I can't begin to figure how hard GECS will be hit over the next couple of years. My second concern is the role GECS plays in helping GE's other businesses make sales. Again, if GECS is hit hard, will they have adequate capital to lend? Some of GE's products are pretty pricey, and I don't know if other lenders could offer the same terms that GECS can. Finally, what happens when the Fed takes the pressure off the short end of the yield curve (raises overnight lending rates, stops buying so much debt, etc.)? Will banks have the cash to lend to GECS at such low rates? Is there a chance they could get pinched between existing longer term loans and rising short term rates? I'd love to hear your thoughts!To get back to the original post, I don't think GE will get back to a 31 cent dividend anytime soon. If my memory is correct, traditionally GECS was responsible for about half of GE's earnings. I don't see that happening any time soon. Also, I'm not sure they'd up the dividend significantly until they restore their AAA credit rating. I don't see that happening anytime soon (long before the downgrade, many used to see GE as a AA company with a AAA credit rating). Restoring that AAA rating will be key to improving profits, so if I had my choice, I'd defer dividend payments until they could earn a AAA rating again. On a lesser note, I think they're facing stiffer competition with some of their consumer products.
rainman,It is definitely hard to say where GECS will be going. I personally think they have set aside an appropriate portion of cash for future losses to their loan portfolio (they have set aside over $8B as of the end of 3Q09), but unfortunately we will have to wait and see. I think they have been running GECS very cautiously and I don't think they will be caught off guard by anything anytime soon.For your second question, historically GECS did not do the lending for the other businesses of GE. I don't want to get into too much detail (as these particular details aren't very important), but GE is divided into 5 sections: Technology Infra, Energy Infra, GECS, NBC, and consumer/industrial (which is also up for sale). Internal to GECS there is GE Money, Energy Financial Services, Commercial Finance, GECAS (what this acronym means escapes me at the moment, but I think it is their aircraft financing). Energy Financial Services used to be considered part of the Energy Division but was recently (~3Q08) bundled with GECS. I would guess that they have kept Energy Financial Services well enough isolated from the "riskier" pieces of GECS in order to keep financing for the infrastructure available; however, I don't know the insides of GECS well enough to state that for certain.Finally, I think the answer for your final question is also "We have to wait and see". Right now banks still aren't lending much even with the virtually free money. This is probably a big part of why GE is reducing the size of their capital division. I haven't heard of any problems with GE or their customers getting money (they are also sitting on nearly $20B of discretionary cash [and a lot more total cash] after the NBC and security systems sales). As long as GE keeps making money (keep in mind that GECS turned a profit in every quarter of 2008 and 2009, unlike most banks), I don't see this being an issue, the banks should be willing to lend to high quality borrowers. GE is somewhat worried about this as well, which is why they have been hoarding cash (they had <$10B cash at the end of 2005, ~$15B end of 2007 and over $60B today). They want to make sure that even if the world ends they will have enough cash to finance their operations for a while.I agree with you about the divi too. I don't think 31 cents is coming back anytime soon. But I think it will also be very hard for GE to restore the AAA rating. Even if they have great financials, I don't see the credit agencies upgrading companies to AAA for a long time after the beating the credit agencies took this last year.They are certainly facing stiff competition in the consumer area and that is why they have been wanting to sell that division for some time now (they don't like being anything but #1 or #2 in the competition). However, it is looking hard and harder for them to find a buyer. It will be interesting to see what they do with this.Hope that helps and wasn't too confusing (even I have a hard time following myself at times),Mike
In response to TheGolden13's post:That post misrepresents GE's balance sheet. I think MikeGi did a good job clearing up the debt issue. The other point to note is that "debt", by itself, means little. You can't look at the Liabilities side of the balance sheet without also looking at the Assets side. There you see that GE has $61 billion in cash, and Total Receivables of $375 billion. That's money people owe them!If you subtract Liabilities from Assets, you get the Shareholder's Equity. It's kind of like an individual's "net worth". It is also the basis for the company's Book Value. GE has equity of $117 billion.Also, "Retained Earnings" is not something GE owes to anyone. You'll see it is not listed in the "Liabilities" section, but under Shareholder Equity. It represents all the past profits made by GE that were not payed out as a dividend. Hence, "retained". It is there to account for how and from where the Shareholder Equity came. I'm surprised no one else pointed out this error!GE's continues to a carry a AA credit rating from S&P, the 2nd highest rating. There are only 6 public US companies with a higher rating (AAA). Bringing up the possibility of bankruptcy seems a bit premature, to say the least.
Jeff Immelt is a menace to the capital of any and all investors in operations he has anything to do with. His performance as CEO of GE cements him as one of the top King Midas in reverse of all time. This means that everything he touches turns not into Gold but into feces. I generally am bearish on the performance of feces as an investment and don't recommend it to anyone. GE is a leper to me until the day that it's shareholders are able to collectively pool together enough brain cells to throw the malefactor Jeff Immelt the hell out of having involvement with GE in any authoritative capacity what-so-ever.
thats a big if !
My CAPS scorecard shows my GE stock at $ 29 range, but in real life I've been adding GE to my porfolio all along ( Like at $ 6.00 / share ) and my real average cost for GE is at $ 19 a share. I feel real good about what GE I'm holding now, this stock will see the 30's again, GE is so diverse the company will excel !
Stock Forecast ? How can I believe it ?Econometric Forecast! Is it possible to predict !here. http://sites.google.com/site/stockforecastbiz/
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