GE: Not-So-Good Things Come to Light
When is a stock safe enough to buy when it becomes difficult for corporations to find financing? We can answer the question two ways: 1) Why should we buy stocks when the financial markets are choking? Better to sit on cash. 2) We can’t tell when the turn is coming, so if we buy companies that are cheap with strong balance sheets and free cash flow, we should do okay over the intermediate-to-long run.
I’m going to illustrate this with a single stock today: General Electric (GE). Why GE? Here’s something I haven’t mentioned recently about how I source stock ideas. I read widely, and when someone tells me a stock is cheap, I write it down for later analysis. My initial cursory analysis during this time of credit stress looks like this (click charts to enlarge):
Let’s look at earnings estimates:
Yeah, is does look cheap. How has it done recently relative to expectations?
Mmmm…. not so good. Looks like they are still working off all of the bad accruals from the Jack Welch era.
Now, let’s look at the balance sheet:
Mmmm… there are a lot of intangibles on the balance sheet. Tangible book value is light. Perhaps the intangibles have real economic value. If so, I would expect to see additional earnings over operating cash flow, and they are not there. Let’s look at debt maturities, could there be a call on cash?
That doesn’t look good. What if we look at only the holding company?
Okay, not so bad. Most of the debt is from the finance subsidiary that I have argued for years should be spun off. In a pinch, what are the odds that they would send GE Capital into insolvency? Very low, so I worry about the refinance risk. Will GE Capital get attractive financing terms over the next several years?
On to cash flows. Here are the cash flow screens:
Okay, free cash flow is positive, and congruent with earnings over the last five years. That’s a good sign. What else is there to look at?
Okay, Price-to-sales indicates that GE could be cheap versus their long history, but it could get cheaper.
Let’s look at summary statistics:
From all of the above, as I look at GE, there is a refinancing problem. Many debts come due over the next 5-10 years, probably matched by debt repayments over the same horizon. The effect of default from these repayments could be significant. I doubt that GE would be willing to send its finance subsidiary into insolvency.
In conclusion, even at the low levels that GE stock price has reached, I’m not comfortable with it. GE will have to refinance a lot of its debt over the next five years, unless they sell or default on GE Capital. The debt load outweighs the seeming cheapness.
Disclosure: no position
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This article has 17 comments:
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Echo To All
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78 Comments
My Website
Nov 19 11:49 AMassuming we have the credit crisis licked by 2009, and GE can refinance, is its stock worth more than 15?
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chipmunk2greysquirrel
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1 Comment
Nov 19 12:14 PM-
Stockguy456
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78 Comments
My Website
Nov 19 12:18 PM-
nelson mandela
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17 Comments
Nov 19 12:38 PM-
Eric in IL
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13 Comments
Nov 19 12:44 PM-
Macro
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4 Comments
Nov 19 01:00 PMSorry but I strongly disagree with your cash flow analysis. Positive cash flow? When GE is issuing LT debt like crazy every year to achieve a net positive cash balance? I would rather argue that the cash flow analysis is extremely disturbing and that the much heralded 2 billion USD cost saving by J.Immelt is peanuts compared to the bind GE capital is in.
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Chris B
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555 Comments
Nov 19 01:58 PM-
Roger Knights
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309 Comments
Nov 19 03:25 PM-
Refinance Guy
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1 Comment
Nov 19 03:33 PM-
najdorf
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82 Comments
Nov 19 07:13 PM-
User 302066
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1 Comment
Nov 20 12:04 AMOut of the various units GE has, it's time to sell there/some assets. "Garage Sale Time".
A lot of good can prevail by the sell of this magnitude.
By selling various units, or franchising these units, smaller players are made, but are held to higher standards by the governing body of GE. 30 years ago we did this with another super ICON AT&T. Breaking AT&T into the various baby bells made us a better nation with the telephone, cell phone, fax, internet and, cable television. WOW, a lot more.
By doing something, like making smaller Baby GE’s might make more sense when we look at the global idea of the CARBON FOOT print. By taking the painful step this concept of going” Green” meets one aspect of making the item in your own backyard. (The purpose of the Carbon Foot print is to lower our use on carbon based fuels. And find a source closer to were we live and work)
I might add General Motors too this list with its ownership of 8 different makes of cars. Maybe its time to sell the brands of cars and trucks we know. Corvette, Chevy trucks, Impala, Buick, Cadillac, Pontiac and make several Baby General Motors, instead of having the American People Bail them out.
Good Luck to us all.
Sincerely
Paul
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copperbaron
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51 Comments
Nov 20 12:31 AMEver heard of Lucent?
They went bust in a real hurry, as soon as the tech bubble started to burst.
Now, I'm not saying that GE has been as foolish as Carly Fiorina and the gang of idiots at Lucent. It is rare to see a company put a thoroughly unqualified person in as head of marketing - which is what Lucent did with Carly - and GE is known for having very good financial controls.
So it could go either way - but the clouds are a lot darker than they were six months ago.
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Greedywhenfearful
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1 Comment
Nov 20 12:48 AM-
Hedged In
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444 Comments
Nov 20 07:57 AM-
formerhawk
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44 Comments
Nov 20 08:54 AMI have recently been thinking about the comparison of Lucent to various companies in this "credit problem" economy. I was with AT&T at the time Lucent was flying and later worked for one of the local exchange startups that had purchased for 10% down with Lucent financing a central office. The problem with Lucent was that they leveraged their own product to keep sales higher but provided unneeded capacity, Most manufacturers are doing this, the real question is whether the product of service is oversold. The problem with Lucent's leveraging was that even before the local exchange startups came into being the local telcos in most cases had plenty of excess capacity mostly due to technological advances in fiberoptics. Of course the startups could not effectively compete with the local Bell companies so they defaulted their Lucent loans. Lucent has never recovered. In the GE case have they oversold their products (healthcare, nuclear, wind energy) so that capacity outpaces the creditors ability to pay the loan? I don't think so but who can say. I haven't heard of a competitor for the India nuclear project, is the demand there for that service and will the people of India have the money to pay? The balance sheet reflects previous performance and for this economy it is probably acceptable. The real question is can demand support the loans GE has made.
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grouper
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6 Comments
Nov 20 10:38 AM-
curbs-in
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418 Comments
Nov 20 02:20 PMYou mean he didn't save GE? Wow! Paulsong never misses an opportunity to tout his buddy Warren. What happend Paulson? How are you holding up Warren?