It looked for a bit on Thursday that GE was going to trade at 10. Round numbers do not mean a lot, but GE with a sub 10 handle makes me nervous. No such luck.
At 9 bucks they have a market cap loss of $400 billion in under two years. The press is still making a big stink about Madoff and a measly $50bil. This is serious money. Citicorp is trading a couple of bucks from the Pinks. The worst case for C is a total wipe out. That would mean a peak to trough in market cap of $300 billion. GE has that beat already.
At $9 a share it is unlikely that they can do a secondary or rights offering to shore up a weak balance sheet. At $7 there is no market solution available. Below $5 implies a market/economic environment that is pretty dark.
What is wrong with this dog? Why does everyone hate GE? My thoughts:
- GE has $530 billion of debt on its balance sheet. In 2009 debt = death. Too much of this debt is short-term. $65 billion is coming due in the next year. Without government guarantees this is going to be a tough nut to crack. Just the empirical size of this makes it strike one.
- When you own the bonds you have to look at what is ‘underneath' you. How much equity is there to shelter these poor bondholders? It is very difficult to put values on businesses these days. Ask AIG, there are no buyers of big strategic assets. Not for cash, anyway.
GE reports tangible book value of $1.40 a share. That comes to about $8 billion. 8 into 530 is a big scary number. That may not be a popular methodology for determining GE’s debt ratio. Unfortunately, it happens to be the one the market is looking at. Strike two.
-A reader reminds me that the $15+ billion of Level Three assets that GE has on the books is a valuation risk. The following definition of Level Three assets does not give me the warm and fuzzy feeling I was hoping for:
Level 3 assets trade infrequently, as a result there are not many reliable market prices for them. Valuations of these assets are typically based on management assumptions or expectations.
A working estimate for level three assets is 50%. Maybe GE has only the ‘good’ stuff. My guess is that if it were worth par they would have sold it. If you mark those level threes to 50 you push that tangible book to a very low number and that leverage ratio just gets silly. Foul tip?
- There are some incredibly smart folks at GECC. For the past decade they have perfected the art of off balance sheet financing. You have to assume they were successful. For sure some of those assets and liabilities are a hidden risk to the balance sheet. There are a lot of nervous creditors out there today. If there were any chance you might get a GECC guarantee back on the table you would try. These deals have all manner of covenants. Material Adverse Change, Net Worth covenants, default covenants tied to GE’s eligibility for margin stock, cross defaults. Because of all that talent in Stamford I’ll give this just another foul tip. But you can bet there are lawyers out there looking at all those deals, and they are sharp too.
- Jeff Immelt is GE’s best asset - and worst liability. No one knows GE like he does. He has the support of the troops. But Jeff made a pact with the devil. He promised “Institutional Investors” that he would keep the dividend, hell or high water. Well, we are in hell and the water is rising.
Face it Jeff, those institutional investors hate you already. It can’t get worse, as far as that goes. The dividend is only $1.25; the stock is down $20 in a year. You were trying to protect the wrong thing. The dividend /strong balance sheet issue should have been a lay up choice for you. Strong balance sheets are in these days. You need to fix yours. It starts with the dividend cut that is already six months over due. You want to see the stock with a 10+ handle? Cut the dividend. It is the right thing to do.
It’s a fastball that’s coming. It is in the zone. What are you going to do Jeff? Hit it or whiff?