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Summary

  • GE Capital which is closer to 50% of GE EPS, continues to shrink.
  • Is Alsthom the answer?
  • Horribly frustrating stock, but you need the GE's for limiting downside portfolio risk.

President Lincoln, during the Civil War, was said to have described his General McClellan, his primary Civil War general pre Ulysses S. Grant, as having "a case of the slows", in terms of his willingness and ability to attack Confederate positions.

I think President Lincoln may have been incredibly prescient, and was really looking ahead 150 years to the post "finance company in drag" business model and the post 2008 financial world, and wondering why GE can't seem to generate any meaningful growth.

When GE reports their Q2 '14 financial results before the market open on Friday, July 18, 2014, analyst consensus is expecting $0.39 in EPS on $36.3 bl in revenues for expected growth of 8% and 3% respectively.

GE has missed revenue consensus 5 of the last 8 quarters, and year-over-year growth (y/y) of GE's revenues have been negative 3 of the last 4 quarters.

In Q1 '14, GE revenue fell 2%, pre-tax income fell 16% and EPS fell 15%. Orders were flat and equipment orders fell 8%.

In Q1 '14 GE's Industrial revenues rose 8%, while GE Capital net revenue fell 9%. Industrial revenue is 70% of GE's total Q1 '14 revenues. GE's Industrial operating income rose 11% in Q1 '14 while GE Cap's was flat. GE Industrial operating income was 70% of GE total operating income in Q1 '14.

With GE Industrial now comprising 70% of GE's total revenue and operating income (using their own segment data) why can't GE generate faster growth?

The best segments in terms of y/y revenue growth for GE in Q1 '14 were Oil & Gas, (27% y/y growth, 12% of total revenues) and Power & Water, (15% of total revenues and 15% y/y growth).

The Alsthom acquisition is expected to expand the Power business, which given the growth, could be a longer-term positive.

Since the summer of 2008, GE has cut a lot of fat (or muscle ?) from the balance sheet:

Total assets, long-term debt :

3/31/14 $652 ml, $221 ml

12/31/13 $657 ml, $222 ml

12/31/12 $685 ml, $236 ml

12/31/11 $717 ml, $243 ml

12/31/10 $751 ml, $293 ml

12/31/09 $782 ml, $338 ml

12/31/08 $798 ml, $330 ml

Total assets of GE consolidated peaked at roughly $850 bl in the summer of 2008, so as of 3/31/14, GE has shrunk their balance sheet 25%, and I would imagine if I went back and looked at GE Capital's disclosures, the asset shrinkage would come on the finance side of the business.

Despite the protestations otherwise, and despite the denials, GE Capital is still a material contributor to GE's total revenue and earnings.

And this is going to continue for a while I think.

So why hold the stock even though many of the 1990's mega-cap leaders have replaced their CEO's, entered new markets, reinvigorated the business model and found new markets?

I'm still hoping GE can do the same.

It was interesting to note last summer when I wrote two Seeking Alpha articles, one each on GE and Microsoft (NASDAQ:MSFT), critical of both Ballmer and Jeff Immelt, there were far more supporters of Ballmer than Jeff Immelt in terms of current and or former employee support.

While most would agree that Jeff Immelt came on at exactly the wrong time (September, 2000) and that Jack Welch was a huge beneficiary of P/E expansion and large-cap growth leadership in the stock market in the 1990s, Jeff has had 14 years, now going on 15 years to change GE's direction.

We currently have a 1.5% - 2% position in GE and are happy to maintain that position given the 3% dividend yield. GE rose 34% in 2014, keeping pace with the SP 500, which we are happy with, given that revenues and EPS continued to show slower growth.

YTD as of July 17th, GE is down about 4% while the SP 500 has risen about 7%.

Here is what I worry about in terms of 2015 and 2016:

GE

EPS Consensus Trends

Revenue Consensus Trends

2014

2015

y/y gro

2016

y/y gro

2014

fy '15

y/y gro

fy '16

n/a

2014

2015

est

2016

est

2014 rev

2015 rev

est

2016

current (7/17/14)

$1.70

$1.83

8%

$1.96

7%

$148,592

$149,348

1%

$155,593

4%

Jun '14

$1.69

$1.82

8%

$1.97

8%

$148,629

$149,262

0%

$155,579

4%

May '14

$1.69

$1.82

8%

$1.96

8%

$148,713

$149,195

0%

$155,579

4%

Apr '14

$1.69

$1.82

8%

$1.97

8%

$148,674

$149,121

0%

$155,578

4%

Jan '14

$1.70

$1.82

7%

$1.99

9%

$149,779

$149,164

0%

$155,648

4%

Oct '13

$1.79

$1.92

7%

$2.07

8%

$150,132

$155,042

3%

$163,874

6%

Jul '13

$1.82

$1.99

9%

$2.06

4%

$151,631

$157,157

4%

$171,999

9%

Apr '13

$1.82

$2.00

10%

$2.16

8%

$151,844

$164,377

8%

$179,691

9%

Jan '13

$1.84

$2.03

10%

$2.29

13%

$156,723

$165,131

5%

$179,981

9%

Dec '12

$1.86

$2.13

15%

$2.30

8%

$159,660

$173,551

9%

$182,014

5%

# of ESTs

14

15

5

12

12

5

* Source: ThomsonReuters current and historical consensus estimates

Source: internal spreadsheet

In terms of valuation, with GE trading at 16(x) forward '14 EPS on expected EPS and revenue growth rates of 3% and 2% respectively, the PEG multiple looks lofty.

Our intrinsic value model values GE at $35, while Morningstar's model values GE at $29, so GE is trading at a discount to both intrinsic value models, and likely could trade up to the low $30s and still be pretty reasonably valued.

GE is almost a consumer staple stock today.

Transforming GE's business model and portfolio has taken far longer than I thought it would and GE's Board has been very patient with Jeff Immelt.

We are going to be patient with the stock, collect the dividend and continue to wait for that "catalyst" that creates value.

In a market that corrects 10% - 15%, I would expect GE to hold its relative value better.

Source: GE Earnings Preview: 'The Incredible Shrinking GE', Or 'Where's The Beef'?