Warren Buffett's (BRK.A) company, Berkshire Hathaway (BRK.B) has increased its stake in General Electric (GE) from 600,000 shares to over 10 million shares, according to its December 31st 13-F filings.
What About GE Impressed "The Oracle"?
Buffett's move makes perfect sense as much of GE's income derives from businesses that comprise the bulk of Berkshire's holdings, like locomotives. GE has reported solid results, with some light revenue setbacks, due to some asset reductions, planned by GE Capital, and a negative Forex of about $132 million (see chart below).
What might have impressed the Oracle of Omaha was GE's order flow in Q4 2013. In Europe, GE increased orders by 3 percent; in the United States, by 8 percent; and in growth markets, by 13 percent. At the end of Q3 2013, its backlog of services hit a record $229 billion-an increase in $6 billion since Q2. Moreover, its industrial companies were up by more than 10 percent in its year-over-year growth. See chart below for Q4 and 2013 highlights. See our prior article here.
Buffett voted in favor of GE's new philosophy with his checkbook, paying $3 billion for GE preferred stock, which pays out 10 percent interest. GE sealed the deal, throwing in warrants to buy $3 billion worth of stock at a price of $22.25 a share.
G.E.'s New Strategy
GE looks poised for an even better future. The company plans to focus on industrial growth by jettisoning its finance business, GE Capital (see our previous article on the GE Capital IPO here). This could help consolidate the giant around big ticket business, like jet engines, rather than an inflationary economy.
Mr. Buffett and other shareholders are obviously impressed by this level of foresight. Previously, G.E. offered shareholders a mix of financial stocks and manufacturing stocks. Now, it is leaning toward industrial growth, like Honeywell International (HON).
Despite GE's strong current performance and rock-solid AAA bond rating, there is always an element of risk--in GE's case, a macro-economic risk, rather than one related to its corporate structure. To date, GE is heavily reliant on short-term commercial paper ($100 billion out of its total $556 billion debt) to support its many operations. Short-term commercial paper is a less-than-stable market. GE is planning to roll out $84 billion in the next fifteen months. Although the company has assets valued at $846 billion, almost $600 billion of this is in the financial business. Hard assets-buildings, equipment, and inventory-amounts to less than $200 billion.
A Calculated Wager
So, what exactly is Buffett betting on? First, GE stock is probably at a low price. Second, GE is making a move to focus on locomotives and airplanes, which could prove lucrative if the dollar continues to dwindle in purchasing power.
Still, the full impact is not in how much money Buffett spent or how high his stake is in GE. What could really matter for investors is Buffett's vote of confidence in a legendary American enterprise.
Buffett's recent move is a vote of confidence that GE will survive the credit crunch with its new strategy, and in the case of an economic downturn, it could be in a position to buy weaker competitors.
We believe long term investors would be wise to join Warren Buffett in buying GE stock which also pays a nice dividend.