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Ortel's GE grandstanding is brilliant -- in a way. Everything he says is true. He says GE over-expanded GEC; GE agrees, so no surprise there. Then Ortel gets a little more subtle by attacking GE's guidance, more or less, by asking why GE is not giving more market-crushing news. He implies GE is not gaining market share, but no one knows; if GE is gaining share, he can complain that GE did not disclose it, and if they are not he can say 'I warned you.' Ortel also threw in his opinion that GE would not even be operating without the government. Since GE has used one program once, he can say that, but it is a bit of a stretch.

The most annoying thing about Ortel's 'analysis' is that he does not present any new information; furthermore, Ortel should have fallen on his sword today, because in his previous interviews he attacked GE's sacred cash flow, which is healthy at current valuation. So while Ortel is scoring points with GE skeptics (stealing candy from babies right now), here are the boring facts:

GEC made $149M from operations. GE has no revenue from stimulus programs yet. GE's quite profitable service backlog is $122B, and total backlog $169B, probably more than annual revenue. GE's operating cash flow is on course to be less than .50x last year, an impressive-at-current-valuation $16B minimum, around 1.51 a share. EPS should be around 1.10 with the usual slightly stronger 2H; however, GE says GEC will earn $2B in 2H, and in my opinion, it is reasonable to assume several billion stimulus revenue in 2H.

So how does that square with Ortel's short case, $2 a share? GE's PEx and P/CFx are getting discounted from historical levels (16x and 10x) because of worries that GEC's real estate holdings will become less stable. 1.05 EPS and 1.32 cash are worst case; at a discounted 12x PE, and a discounted 7.5x for operating cash flow GE is minimum ~$10.50. As GEC's real estate stabilizes those ratios will rise. In other words, if short, you are betting that it is more likely GEC's debt will destabilize, because low revenues are already priced in. On the other hand, add 0.20 for GEC's expected profit and a few cents for stimulus profits and that minimum valuation goes up even more.

Many investors feel that GE screwed them with incorrect positive guidance, and GE definitely was greedy and short-sighted in regards to over-expanding GEC. Two words: cash flow. I cannot guess what the market will do but from my perspective GE looks like a better bet to finish the year around $17 because of cash flow. So Ortel, please keep pushing those shorts, I look forward to the squeezes.

Source: Debunking Ortel's GE Short Case