When you look at the chart, the stock has certainly fallen out of bed. From a numbers standpoint, it continues to produce solid earnings, albeit much lower than just a few years ago.
In 2007, GE (GE, Financial) booked $22 billion in profit. It was an awesome year. Last year it earned $8.8 billion and in the last 12 months that figure is down to $7.5 billion.
Does it need new management? Obviously. But remember that you should buy a business based on its brand’s durable competitive advantage and not its management. GE was founded by Thomas Edison and company in 1892 and the only CEO people remember since was Jack Welch.
Would the company benefit from better management? Absolutely. However, it’s a hard job running a $100 billion organization with the amount of moving parts General Electric has going at once.
I mean, just going to the company’s website makes it seem like you're searching the entire web. GE has a search engine on the front page because it doesn’t even know what to focus on itself. Don’t get me wrong, it’s an amazing design, lightning fast, and that’s what GE needs to be again.
General Electric shares are down north of 30% in the last three months alone. Much of it came last week as the company announced a $15 billion shortfall in reinsurance reserves tied to Genworth’s long-term care spinoff. That quickly prompted a Securities and Exchange Commission investigation, calling the oversight of GE leadership into question and seemed to shock investors who were scratching their heads wondering just whether GE could allow the situation to get this worse.
New CEO John Flannery has announced a lot of changes including a 50% reduction to the quarterly dividend to put some of that money back into growth endeavors. To a value investor, the selloff should be good news as it brought the quotation down to levels not seen since 2011.
Flannery also set new earnings targets for 2017 and 2018 of around $1.10 a share and said the company would address concerns that its reporting methods need to be simplified.
The company will focus on three key areas going forward: aviation, power and healthcare. With the transportation and lighting divisions on their way out of the company’s portfolio, this which should give them capital to square up these shortfalls.
Elsewhere, the cost-trimming goal has been raised by $1 billion, to $3 billion, and the number of board seats will be reduced from 18 to 12. Don’t expect 2018 to produce that stellar turn around. This is a massive organization. Yet, as long as management continues to show positive signs, first from a business standpoint and then from a financial one, the stock will move higher.
One negative that will likely lead to a longer-term positive for the company is the reduction in overall headcount, with over 10,000 employees to be laid off. A decline in demand for coal and natural gas products has made the power arm vulnerable, and roughly one in five jobs will be eliminated. The company has to take a step back to take two or three steps forward from here.
I could give all the bad news and headwinds GE faces, such as that it has $134 billion in total debt with a pretty massive interest payment attached, only $19 billion in cash, single-digit return on equity and investment capital rates, and continued margin capitulation.
However, this is GE. It “brings good things to life” and now it is “imagination at work,” which is exactly what will be needed if the company doesn’t want to further decline into divesting and liquidation. Plenty of other companies would do well to have one of GE’s multi-billion dollar units as bolt-ons.
Investors getting into GE at this price will make money long term, with the potential to outperform the S&P 500 as well. Remember, the time to buy isn’t when everyone is piling on with good news in a bull market. Be greedy when others are fearful.
Disclosure: I have no position in GE.
