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Jonathan Poland
Jonathan Poland
Articles (505)  | Author's Website |

Berkshire Hathaway Should Buy General Electric

Buffett is looking for an elephant with $100 billion in cash. GE's selling for a bargain at $80 billion with management attached

March 07, 2019 | About:

Someone is going to make a lot of money buying General Electric Co. (NYSE:GE) under $10 a share, so why not Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B)? GE is one of the few companies to survive the last 100 years and become more valuable. However, today its stock is priced lower than it was during the 2008-09 housing crisis and on par with where it was in 1995. Of course, looking at the numbers alone, it’s easy to see why.

The global conglomerate has suffered declines across the board. Annual revenue is down $35 billion (22%), operating income has tumbled $20 billion (69%), book value is off 68% and free cash flow has turned negative. This has pushed the company's working capital down below its total debt, from a level that was almost enviable in 2009 - $316 billion. Yet, the cache within General Electric is still worth much more than its current $80 billion market capitalization would suggest.

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In fact, even though the market had high hopes for the company’s turnaround in February, shares are at the same level they were in my first piece on GE. The stock is also still a buy long term, either as a whole or because it will spin off or sell some of its parts. In both cases, the company’s worth more than the current ticker quote represents. Thank you, Mr. Market.

GE has $20 billion in cash and has cut its dividend to almost nothing in an attempt to retool and refocus. That cut will save almost $4 billion a year. It is going to spin off the health care division this year, which has annual revenue approaching $20 billion but is loaded with debt, pushing up the enterprise value to $70 billion. Selling that will free up cash and drastically lower the debt load, all without crushing its revenue. GE Power has been problematic, forcing the company into a $22 billion write-down on the unit, but it still generates a great deal of cash flow. Aviation is the one bright spot at the moment, with revenue growing to $30.5 billion last year. So with only one engine working, the company is worth $80 billion. If someone (like Warren Buffett (TradesPortfolio)) can get one or two or all of the other parts working again, the investment is an easy 10-bagger.

Maybe I’m looking at this through rose-colored glasses. Maybe GE is doomed to fail, going bankrupt and sold off at pennies on the dollar for the parts alone. That’s why Berkshire Hathaway should step in and buy the company.

Berkshire has over $100 billion to invest. GE is priced at $80 billion, which could fall lower before it is able to unload the health care division, a unit that generates $3 billion in earnings. While this is a lot to lose right now, it’s not the crown jewel long term. If other parts were doing well, it would be seen as a positive to get the debt off the books. Even without the health care unit, if GE could return to profitability across its other segments, the owner earnings it would provide Buffett and eventually the next CEO would pay for the acquisition in less than 10 years.

Yes, Buffett is quoted (some 30 years ago) for saying that "turnarounds seldom turn," but when they do, shareholders are greatly rewarded. If any company can turn around, it’s General Electric.

Disclosure: I am not long or short GE or BRK.A/BRK.B.

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About the author:

Jonathan Poland
I spent more than 15 years helping DIY investors earn over 30% a year. Today, I help business leaders take those insights and build better assets. I rarely write about stocks that I own. Thanks for reading. Do your own analysis before investing.

Visit Jonathan Poland's Website


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Comments

DanaBoy
DanaBoy - 1 month ago    Report SPAM

GE has a history of negative free cash flow, negative operating cash and debt up to their eyeballs. With these many negatives, why would anyone buy such a company? Buffet's first rule of investing is don't lose money. And, his second rule of investing is don't forget rule one.

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