A Close Look at GE Ahead of Earnings

General Electric (GE) is to release its earnings on Friday. The consensus is for 23 cents EPS (down 57% from a year ago). GE has so many ways to move this number that I would look for it to be the standard 1-2 cents ahead of expectations. This will give Mr. Immelt’s cheerleaders at CNBC something to crow about.

More important will be the forward guidance. It is hard to imagine that the folks at GECC are doing very well. A competitor, CIT, is looking at a chapter filing in the near future. The industrial side is no doubt doing better than that, but there can’t be much good news on that front either. Locomotives, jet engines and wind turbines are just not hot businesses to be in today. Ask T. Boone about wind.

This sets up the possibility for another run below $10 for the stock in the near future. The following chart shows GE’s performance versus the S&P. Sure, the stock made a great bounce off the $6.66 March 5 lows, but it has clearly lagged the broad market recovery.



The March low had nothing to do with GE. At the time, the global economy was falling at a 15% annual pace. It looked like Citi was going out of business. The lights were going out. All of that proved to be a head fake and the market quickly responded. GE’s V-shaped March low should be excluded from the chart.

A share price around $10 is a problem. It limits GE’s ability to sell new equity without murdering the existing shareholders. A big increase in the share float at this time would drain cash because even the new lowered dividend is double the historic (2%) yield. Preferred stock would be very expensive. This implies that there will have to be more debt.

Then there is the market capitalization issue. I look at the Market Adjusted Debt to Equity ratios (“MADE”). There is so much hype in the balance sheet it is hard to really look at how much equity there is. I let the market determine how much the equity is worth. The following comparisons are based on current market cap data. The liabilities are net of preferred and common. The liability numbers are 3-6 months stale. I do not think there is much change in those numbers.


GE is neither beast nor fowl. There are no ‘good’ comps. Clearly GE is leveraged 3Xs the other industrials but well less than a strong financial like GS. The comparison to Sears is irrelevant but interesting nonetheless. The GE competitor CIT is headed into a black hole. It is notable that their MADE ratio is the same as Citi’s. That BAC is 10Xs better than C is also an eye opener.

I believe that GE’s corporate debt level is going up. I am concerned that some of their off balance sheet stuff comes back on the balance sheet. This happened with the banks and their SPIVs last year.

GE is 1/3rd a financial and 2/3rd an industrial. Based on that it should have a MADE of 5. It is 25% above that now and that ratio has nowhere to go but up.

Disclosure: None

Comments

[Perry B:]

Good article; I have been following GE and have not been impressed for the same reasons you mentioned. To much leveraged debt. No way to raise capital. This spells certain disaster. I agree with the cheerleading aspects of CNBC. What bafoons. One should also Look at AIG as well. The twenty to one stock split did nothing but drain them further. Buying them some undeserved time to stay in the market. Based on the to big to fail sentiment. Draining dumb money retail traders. (Such as myself) Now that AIG has succesfullly scammed this reverse split it set the foundation for other, over leveraged to big to fail companies to follow suit. (GE) This stock splitting puts all the money left in the company in the hands of the major players trying to get out. Ge will share the same market fate as AIG. as they try through market manipulation to maintain their position on wall street.

Jul 13 08:38 AM

[Supersuperman:]

Good insights. I am not too impressive either. In fact, Charles Ortel, the long time bear managing director of Newport Value Partners, think GE only worths $2:

www.wealthalchemist.co.../

Jul 13 10:28 AM

[Wisdom vs. ...:]

GE is beast and GECS is fowl-- they have separate income statements & balance sheets on reports. it is easy to value each company. GECS is making massive payments on their massive debt, and forward guidance from GECS is $2-2.5B annual earnings-- this year (not that i believe that). If you are having trouble with the valuation then simply assume GECS will break even indefinitely (17 years?) and figure the value of the rest of GE. wind turbines will sell well in China, but speculation about that is silly

at $11, GE is already priced for disappointment; IMO GECS's risk is already 100% priced-in

i could write a long article on other problems at GE; however, i am buying more GE below $11, will sell that portion after they surprise either this quarter or next. GE is still one of the best collections of engineers on the planet

Jul 13 11:17 AM

[RiskAverseA...:]

GE being 1/3 a financial is little consolation in an environment where debt, systemically, is glaringly unsustainable without fully functioning private credit markets.

(Note to Treasury Secretary: Closing the barn door ten years or so too late on OTC derivatives that once facilitated the grandest Ponzi scheme in history, and in which GE fully participated, will not at this point make existing debt levels systemically sustainable.)

Jul 13 11:49 AM

[BPYHO:]

GE is overrated. I would much rather invest in a company that sticks to a specific industry (ie alternative energy, industry, ect) than one that is average in all of them... This company will be a laggard for years.

Jul 14 12:06 AM