General Electric (GE, Financial), the aviation, healthcare and power company, was the largest detractor. In August, fraud investigator Harry Markopolos, working with a short seller, released a report alleging the company was concealing financial problems. The report focused mostly on the company’s long-term care insurance reserving and the accounting of the Baker Hughes GE (BHGE, Financial) stake. GE management responded firmly, pointing out that the work in the report was flawed in that it incorrectly compared insurance policies across the industry, and the BHGE accounting had already been properly footnoted. Our appraisal was not impacted, as there was no new information. We already factored in additional contributions to bolster GE Capital reserves due to lower interest rates as the year has gone on, and our sum of the parts appraisal already incorporated the loss on the BHGE investment. CEO Larry Culp and numerous other executives and directors bought several million dollars’ worth of shares as the stock dropped on the back of these headlines. Later in the quarter, the company raised another $2.7 billion of cash by selling down the next portion of its Baker Hughes stake. Operationally, GE reported moderate revenue growth in aerospace, though the ongoing Boeing 737 problems will temporarily delay some of the segment’s cash inflows over the coming months. GE Power revenues shrunk 5%, but much more importantly Culp cut the unit’s cash burn as it approaches profitability. The share price has since rebounded 17% after the initial 15% decline in the aftermath of the report, but it remains overly discounted today. We highlighted GE and Larry Culp last quarter as an example of a management team that had already taken steps to turn around the business, and we expect to see additional value-accretive transactions in the future, as Culp remains focused on opportunities to monetize assets at fair prices.
From Longleaf Partners' third-quarter 2019 shareholder commentary.
