Back in January, when General Electric (GE, Financial) was trading in the low $16 range, the stock looked like an obvious buy. At the time it was already off nearly of 50% from the prior year, but fast forward nine months and, with the price off another 20%, GE is too cheap to ignore.
Taking steps to turn around
While the stock is trading at historically low price multiples, the company remains one of the most recognizable brands in the world. It's in the first stage of a multi-year plan to exit $20 billion worth of industrial assets as the company is seeking to get back to growth and profitability. Last month, GE announced it was looking to sell power-conversion unit Converteam for $1.5 billion, a price that is 50% less than what it paid for the company back in 2011. Yesterday, GE announced that it is selling its aircraft part maker MRA systems for $630 million. These are simply signs that the company is executing that plan.
"Both our operating and investment experience cause us to conclude that turnarounds seldom turn," Buffett wrote in 1979, and "the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price." GE is still a good business.
Getting kicked while down
GE was an original member of the Dow in 1896, but in June it was removed from the index. It's not hard to understand why.
Since 2008 the company has gone from $181 billion in annual sales to just $123 billion. Gross margins are the real disappointment, decreasing from 53% down to 21%, which led to operating income of $5.4 billion over the last 12 months and a net loss of $7.1 billion. Ten years ago GE generated $17 billion in net profit on operating income of $45 billion.
A bigger issue is GE's dwindling working capital, which has decreased by 72% to $66 billion from $236 billion over the last five years alone.
Let's break up
While GE's market capitalization has slid backwards, other big companies have been pounding out profit and piling up cash. That will help the company find buyers for its parts as it slims in order to pay down the $126 billion in borrowings and build more into the underfunded pension.
Aviation is valued at north of $80 billion and is the crown jewel of GE's entire business. GE essentially competes in a duopoly in both the wide-body (twin-aisle) and narrow-body (single-aisle) planes against Rolls Royce and United Technologies. It commands above 60% of the narrow-body market and above 40% of the wide-body market as measured by deliverables. During the June quarter, this segment produced $1.4 billion in profit on $7.5 billion in sales.
Health care is valued at more than $50 billion and has been a growth story for the company for years. GE has a stronghold in many segments within the industry including MRIs, X-rays, CT scans, ultrasounds and mammography machines. In the June quarter this division earned close to $1 billion on $4.98 billion in sales; however, GE also stated that it intends to separate health care into a stand-alone company during the next 12 to 18 months.
Apart from these two segments, GE is a sinking ship. Power, the largest by revenue, has seen major declines, but it's still profitable, as are both oil and gas, and renewables. GE Power still accounts for more than 30% of the world's power, according to Bloomberg. That revenue stream will likely be around for as long as we have electrical grids.
Why is General Electric selling off its parts? The company is either shoring up its financials or getting ready to be acquired by a company with tons of cash. Remember, GE has an enormous pile of debt, over $120 billion at last count. That would pose a problem to any potential buyer or merger target, but that hasn't stopped some guru investors from taking a position in the stock.
Guru ownership
Billionaire Nelson Peltz of Trian Fund Management has 9.61% of his assets in GE, followed by Mason Hawkins (Trades, Portfolio) with 5.33% and Bill Nygren (Trades, Portfolio) with 4.31%. In the worst case, it's worth holding for the current dividend and seeing what happens as it sells off some of the best and worst parts of its business.
Disclosure: I am not long/short any stock mentioned in this article.
