GE: Can You Hit This Fastball, Mr. Immelt?

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?

Disclosure: None

Comments

[charles hopfl:]

Immelt looks good on Charlie Rose and other media shows. If only looking good would translate to NBC which has not had a decent show in years. Even Leno makes fun of NBC, and as he says, "is anyone even listening". Bottom line, Immelt leads an arrogant bunch of managers, leads by the nose an faceless Board, and has led the shareholders down into a bottomless pit. A clean sweep of these supposed managers would do a lot to resurrecting the credibility of the company. The CNBC talk show hosts should show some spunk.

Feb 27 11:21 AM

[ChipSeal:]

"I see nothing he can do to turn it around right now and i don't see him being able to do anything for 3 or 4 years, at least. He cant sell off assets in this environment, they aren't worth anything."

GE could sell its wind turbine business for a premium. After that I agree.

What division is going to outperform? Media? Appliances?

While their heavy industry has bright spots, they are fighting the headwinds of foreign currency and world recession.

Whatever value GE has is being torpedoed by GECC. Who has confidence that they will be able to dodge the next credit shoe to fall: Commercial real estate?

Feb 27 11:58 AM

[danS:]

I would like to see one of you guys right an article that starts with " I think GE (or whatever other stock you are discussing) should be selling at its current price because in 3 years its profits will still justify the current valuation it has or no more than 20% higher than its current value." If you cannot say that then the stock to me is obviously over sold.

Once the recession ends GE will be making $2 a share. At a conservative valuation of 12 to 1 ( historic valuations for the S&P 500 have been closer to 15), this means the share price should be about $24 in a couple of years. If the stock is still $10 in 3 years the dividend return will most likely be 10 to 12% and the dividend will easily grow 7% a year as it has in the past.

Feb 27 12:57 PM

[avg,American:]

Wonder if Warren Buffett got his GE investment last October in preferred shares slahed also ? When Buffett told America to buy buy buy about the same time.

Feb 27 02:23 PM

[trw88:]

Buffet got a 10% dividend (that wont be cut) meaning huge cash flow that he can use to buy whatever he wants cheaper and he makes his money back after 7.2years. So let's say he holds the stock for 7 and a quarter years - his profit is whatever the price of the stock is then. Sweet deal, he cant lose on these.

He also has warrants to buy for 5 years around $22, if I remember correctly.

Feb 27 03:39 PM

[THE rainman:]

WOW!!! The market didn't seem to like cutting the dividend. Let's hope that move wasn't a strikeout.

Feb 27 04:28 PM

[jstratt:]

Interesting article! I think it underestimates GEs value. I will stick with my Feb 17 assessment which was as follows
---

In Oct 2007 I owned about 1200 sh of GE and concluded that GE was a financial company and we were entering a financial crisis. I sold off over 50% of my position.

Last March 2008 I believe it was when Immelt stated that earnings would be good then 2 weeks later announced bad earnings. I did some research and located the GECS 10k. From memory I recall 40 billion in RE purchased in the past 2 years and 50 billion in SIV assets. They also pointed out that their large consumer debt was non US and mostly UK and the rest of the world. I sold the rest of my shares above $30.

In December 2008 I concluded that GE will likely not fail and began watching it. In the past few days I purchased a small amount of GE. It is not a time to be greedy. Buy a long term position about 1/10th at a time. Perhaps even start buying some each month for a year.

GE will survive. Much of the dividend and Immelt will not. I will not suggest GEs future low or high but I suspect it will go lower and then rise for many years. Purchases in this era will do well over time do to GEs diversified business mix and some level of financial acumen. This is however my only allocation of high risk capital.

Feb 27 07:38 PM

[James Quinn:]

Maybe the unthinkable is thinkable.

seekingalpha.com/artic...

Feb 28 03:22 AM

[Bruce Krasting:]

tks. I will forward your comments to JI. I think he is watching this....
bk


On Feb 27 08:37 AM ex GE'er wrote:

> Believe me, Immelt doesn't have the support of anyone, except the
> mindless board. He has personally destroyed this great company with
> his arrogance and inability to state a vision. We can only hope
> his father, a GE retiree, will be eating dog food with the rest of
> us in our retirement, thanks to Jeff.

Feb 28 06:43 AM

[Bruce Krasting:]

I agree with you. we are just a few $'s away from a price level that forces
GE into the hands of the Treasury.

GE is an ongoing concern. They can survive this. But not with a weak balance sheet. The steps JI took on Friday may not be enough, or too late. We will find out in one week.



On Feb 28 06:22 AM martypaul wrote:

> GE can become the unthinkabel. I dont believe GE will go out of business.
> However, If Ge gets to $5 or below, it can be the final straw in
> our fall into a depression

Feb 28 06:46 AM

[Bruce Krasting:]

We were pretty close to a melt down when Buffet stepped in. I wonder if he was not "pushed" by Treasury to do a deal. To make a statement, "don't worry folks, smart guys like Warren are buying you should too".

Warren has a lot to lose if stocks go down. I think he investment in GE was half, this is a "good investment", the other half, "If I do not do this the market will collapse and i will lose even more money"..

Buffett's stock has been killed in the last year. This oracle does not know what to do in this bear market.

So much for the Buy and Hold.

bk




On Feb 28 06:18 AM martypaul wrote:

> Of course not. You only screw the little guy. Buffett is laughing
> all the way to the bank. Meanwhile Buffetts great empire shares have
> lost almost 50%. He WAS a great investor, but his time is over. His
> stock has gone from approximately $130,000. a share to about $77,000
> a share. Talk about an elevator ride. The man doesnt ever sell, or
> buy some type of protection like puts.

Feb 28 06:51 AM

[Bruce Krasting:]

Tks for your comments. I found it interesting that you described your investment in GE as your allocation of High Risk capital. My point is that GE should not be a high risk. It should be a pretty stable company with stable and growing earnings, a stable balance sheet, etc. But surprise surprise, it turns out that this is a very high risk situation.

This was supposed to be a stock for widows and orphans. Not any longer.


On Feb 27 07:38 PM jstratt wrote:

> Interesting article! I think it underestimates GEs value. I will
> stick with my Feb 17 assessment which was as follows
> ---
>
> In Oct 2007 I owned about 1200 sh of GE and concluded that GE was
> a financial company and we were entering a financial crisis. I sold
> off over 50% of my position.
>
> Last March 2008 I believe it was when Immelt stated that earnings
> would be good then 2 weeks later announced bad earnings. I did some
> research and located the GECS 10k. From memory I recall 40 billion
> in RE purchased in the past 2 years and 50 billion in SIV assets.
> They also pointed out that their large consumer debt was non US and
> mostly UK and the rest of the world. I sold the rest of my shares
> above $30.
>
> In December 2008 I concluded that GE will likely not fail and began
> watching it. In the past few days I purchased a small amount of GE.
> It is not a time to be greedy. Buy a long term position about 1/10th
> at a time. Perhaps even start buying some each month for a year.
>
>
> GE will survive. Much of the dividend and Immelt will not. I will
> not suggest GEs future low or high but I suspect it will go lower
> and then rise for many years. Purchases in this era will do well
> over time do to GEs diversified business mix and some level of financial
> acumen. This is however my only allocation of high risk capital.
>
>

Feb 28 06:58 AM

[Bruce Krasting:]

Buffett has not had a restructuring of his GE preff. If he does in the next year it is because there is a crisis. So let's hope for no restructuring of this one.


On Feb 27 02:23 PM avg,American wrote:

> Wonder if Warren Buffett got his GE investment last October in preferred
> shares slahed also ? When Buffett told America to buy buy buy
> about the same time.

Feb 28 07:01 AM

[Bruce Krasting:]

I think the Board changed their mind after reading my blog and the comments from readers.. Just kidding...


On Feb 27 05:40 AM ED K wrote:

> The facts and figures in your article support your contention that
> the dividend should be adjusted or maybe even eliminated.
>
> Apparently the board of GE does not agree with you.I have not seen
> them do anything of substance to stop the bleeding.They either don't
> care or feel that they will be able to wheather the storm without
> any adjustments to their operation.I find this hard to believe but
> they are on the inside and maybe they know something that we don't.
>
>
> Even as their market cap fell below $100 billion recently we heard
> nothing about any change in their operation.
>
> I don't think GE is going to go out of business but their actions
> or lack thereof are perplexing to me and yes iam a shareholder.

Feb 28 07:02 AM

[Bruce Krasting:]

An optimist. Well, we need some of that thinking. I hope you are right on this. I hope in three years GE has lots of profits and we have something else to worry about. The problem is that to get to three years we have to first get through 09. GE would not stand up to a real Stress Test at this point. The company is 'at risk' . I know that is hard to believe. But it is sadly true.


On Feb 27 12:57 PM danS wrote:

> I would like to see one of you guys right an article that starts
> with " I think GE (or whatever other stock you are discussing)
> should be selling at its current price because in 3 years its profits
> will still justify the current valuation it has or no more than 20%
> higher than its current value." If you cannot say that then the
> stock to me is obviously over sold.
>
> Once the recession ends GE will be making $2 a share. At a conservative
> valuation of 12 to 1 ( historic valuations for the S&P 500 have
> been closer to 15), this means the share price should be about $24
> in a couple of years. If the stock is still $10 in 3 years the dividend
> return will most likely be 10 to 12% and the dividend will easily
> grow 7% a year as it has in the past.

Feb 28 07:06 AM

[Bruce Krasting:]

CNBC hosts have very clear rules on what can and can not be said about GE. I would not expect to get the "right story" on GE from CNBC.



On Feb 27 11:21 AM charles hopfl wrote:

> Immelt looks good on Charlie Rose and other media shows. If only
> looking good would translate to NBC which has not had a decent show
> in years. Even Leno makes fun of NBC, and as he says, "is anyone
> even listening". Bottom line, Immelt leads an arrogant bunch of
> managers, leads by the nose an faceless Board, and has led the shareholders
> down into a bottomless pit. A clean sweep of these supposed managers
> would do a lot to resurrecting the credibility of the company. The
> CNBC talk show hosts should show some spunk.

Feb 28 07:08 AM

[svosavvy:]

since we're talking baseball, how about adding the blind umpire (ratings agencies). There should be no such thing as credit watch negative, they should cut the rating or don't. Credit watch negative, that is the equivalent of being put on the six o'clock news charged with an awful crime, that puts you in the position of guilty until proven innocent. In other words no one will buy your debt because the rating is marked AAA, but, you have now effectively scared people away from buying. They are now going to wait until the rating is taken down to get the higher yield. So you are now talking an increase in the credit freeze, way to hamstring a company. I agree with a lot of the sentiment already posted that they may be fixing the curtains on a ship taking in water.

Feb 28 10:01 AM

[SplashDog:]

This is a sad but true string...I've been a shareholder for 50 years and it feels now like I will outlast the company. I won't complain about the rating agencies they are a complete joke. They are probably holding off on a multilevel downgrade because of collateral problems GECC would have with it's derivative book. This is the "backdoor" where the insane amount of government money has disappeared at AIG. Is it a coincidence that these were the two main US AAA derivative players? Immelt is an embarassment and the board is in bed with management but this huge problem pervades American business. No GE's unique problems go back to Jack when he realized he could fool investors by tacking a massive unregulated financial opperation onto an industrial conglomerate. With this structure he achieved two vauable things. Financial games in GECC were used to stablize earnings from cyclical busnesses. And the apparent steady and rising earnings were accorded a higher multipule. But it was allways a trick and the market hates being fooled. Now everybody gets the joke. The early years of this decade the stock dramatically underperformed as the multiple went from 30 to 10 even as earnings rose. And now in this financial crises the fatal flaw of the GE paradigm is playing out. What solid industrial company could survive being tied to a massive unregulated financial operation intent on pushing the envelope of accounting rules, derivatives and off-balence sheet transactions?

Feb 28 05:16 PM

[PeteK:]

GE is everything everywhere, that's the problem.
To a point people don't know what GE is doing or making any more.
GE owns News outlet (CBS ?) and hundreds of other things, why ?
DIS owns ABC, why ?
News media nowadays are so bias, Why a normal business wants to
own such bias ? Stupid.
GE may not have the union problem like Boeing, but too many wings
that are hard to control. That's a mess in itself.

Feb 28 05:19 PM

[dawase@gmai...:]

1. Immelt has ZERO credibility. Full stop.

2. GECC is a black box with untold liabilities in areas that expected to implode in the coming year (ie. commercial real estate)

3. $65B in debt due this year alone in the middle of the worst credit crunch in our lifetimes.

4. Their pension is underfunded to the tune of $10B or so and they're starting to play games with the underlying assumptions.

5. Look at the deterioration in the quality of their cash flow in Q4 of '08.

6. Want to keep going?

The writing was on the wall when Immelt said they were on track to make their numbers and then not three weeks later they missed by a mile. The guy should have been given his walking papers before Christmas.

I sold 50% at 24 and 50% at 13. I still hold GECC notes due 2009 and 2012. We'll see where this winds up, but frankly I'm not excited. I sold the 2014s I held, and will probably kill off the '12s in the near future. I think some sort of a debt cramdown a la the automakers is in the works - maybe they even splitoff the finance arm from the industrial arm.

Mar 01 01:12 AM