What Went Wrong at GE?

Here's a friend's take on the General Electric (GE) news Friday:

What Went Wrong at GE?

I won't go into detail because all the punditude doing that... But what I haven't heard from the punditude is the fact that GE is known for having the most managed earnings stream on the street... this never happens with them. So what changed all of the sudden? How much did things slow? Remember this is a company where insiders were buying hand over fist 1-2 months ago... So how sharply did things slow that last month?

And with respect to the punditude... man, the spin out there... GE guidance/orders etc. stunk across the board ex infrastructure (inflation) -- in fact IMO order book looked much worse than what their numbers show (except for businesses exposed to inflationary trends as their revenue source IE infrastructure)...but as is typical of the market, somehow GE is "company specific"...here is an example of some of the spin:

"GE miss DOES NOT have implications for broader industrial or financial names. It's just a bunch of odds and ends that all hit at the same time. We were on the road with Emerson last week, and they said they're not seeing anything."

BTW, also what is fascinating for those who say there is alot of "negativity" (is that a word?) out there, the VIX hit its LOW for the year [Thursday]... precious that GE comes out and whiffs the day after that happens... anyway the financial system is a wreck and equity market VIX put in a low - makes perfect sense???

I think he's right about everything, except for this: "GE is known for having the most managed earnings stream on the street." GE under Welch indeed cooked the numbers and probably went way over the line (see: Greenberg, Hank among countless others), but we like Immelt in part because we think he's not cooking the numbers -- hence the less predictable earnings and the occasional big miss like this one. GE may well be pretty interesting here... though we don't own it.

Disclosure: No positions

Comments

[CrossProfit_:]

"GE may well be pretty interesting here"

Yes, this is true and one can (almost) never pick the bottom of a bottom nor the top of a top. The recent insider buying just says that management has long term faith in the company and that one or even two bad quarters does not spell the end of all.

However, short term investors may want to consider other plays. Long term investors (12 months or more) should do just fine with GE at the $32 level. It may go a bit lower, then again maybe not. At a P/E multiple hovering around 15 based on 'poor' earnings, unless there is a global depression, GE should regain ground fairly quickly.

In our analysis, GE has a 30+% upside from here, see;
www.crossprofit.com/se...
or
www.crossprofit.com/vi...

There are several Seeking Alpha contributors that have consistently written about diversifying an investment portfolio. GE is pretty well diversified on its own though is not in equal parts for all sectors. Just like ETF's, when everything takes a hit, the ETF will take a hit as well. Likewise, when more than 50% of your divisions experience a slowdown, the outcome is obvious.

Having said all that, though GE missed expectations, it still turned in a positive quarter...food for thought.
.
CrossProfit

2008 Apr 12 04:07 PM

[Hedged In:]

I'm not sure that "managing the numbers" is synonymous with "cooking the books", Whitney. Managers often have leeway about which quarter to book numbers in, often by actually delaying closing dates etc.

So I tend to agree with your friend, that the miss is really significant.

2008 Apr 12 05:08 PM

[andrewh10:]

If anyone was paying attention to the GE options it would have been clear that GE was bound to have terrible numbers. The put volume swelled in the last few weeks indicating hedge funds were taking large bets against them. Lets face it not every company has as much exposure to the credit markets and real estate. These are two terrible areas to be in right now and for the foreseeable future. Barron’s, seems to still like GE at these levels suggesting that there might be a possible 30% upside even with earnings estimates cut to $2. However, I disagree with this assumption and think they are way overly optimistic. Monster conglomerates have been out of favor for awhile because the business model is spread to thin. The infrastructure growth derived mostly from emerging markets will slow down soon. A twelve month price target of 36 seems reasonable; on the positive side at least you can count on your 3.5 - 4% dividend yield.

2008 Apr 12 05:34 PM

[Bourbeau:]

My comment on all this is relatively straight forward. Where were the auditors - internal and KPM&G? GE just had their financial statements for 2007 auditied - none of this was apparent on the books of the GE Capital segments? As far as this being a bump in the road - I doubt it; bumps in the road don't cause earth quakes. And as far as not knowing about this, what was GE Management doing since last summer when all of this subprime/credit mess was being uncovered - sleeping?

2008 Apr 12 05:46 PM

[Donald Johnson:]

I don't know whether my post on GE Healthcare, which I put on my blog and offered to SA about an hour before CNBC did the same story, will make it on to SA this weekend. But back on March 1 I wondered whether the muni bond auction market turmoil would cause hospitals to cut cap expenditures, and GE executives said it did and will continue to be a problem. A quick search of the conference call transcript, which was posted last night, shows how concerned Immelt is about the closure of a major plant by the FDA for 20 months. As the former head of healthcare, he's not happy with its first quarter results. How serious the GE Healthcare's problems are remains to be seen. A lot depends on how the credit markets shake out.

2008 Apr 12 06:33 PM

[John Pseudonym:]

"Remember this is a company where insiders were buying hand over fist 1-2 months ago... So how sharply did things slow that last month?"

This is always a sign for people like me to investigate a stock as a possible short.

"insiders" are wrong far more often than they're right.

2008 Apr 12 06:41 PM

[SA Guest:]

Mark Haines co-host on Friday AM shared with CNBC viewers that “there was a silver lining to the GE sell-off stating that every time the stock has sold off in the past, six months later the shares fully recover e.g. an easy 10% to be made (13% by the close). Normally they’re pretty cautious when discussing the mother ship. At least Haines, who is one of the few straight shooters there rolled his eyes and said “I’ll believe it when I see it”.

2008 Apr 12 06:56 PM

[dtrend:]

Donald,

I have the same concerns for Intuitive Surgical (ISRG) and the healthcare economy. My wife is a surgical nurse and she loves their minimally invasive surgical robot, which by the way, cost her hospital $1.8 million dollars. I have already had the unpleasant experience of explaining to her why I sold 200 shares of that stock that I had bought for $89 for $117, when the stock approached $350 per. Hmmmm

With business, financing climate and healthcare costs the way that they are, I worry about owning this very high price stock, however, I just watched it run from about $259 to over $350 (again) in $15 dollar per day chuncks! This stock can leap like a gazelle! Price the options some time. Wow!

My wife's answer to my concern is that the company makes a large profit on parts, upgrades and ongoing training.

I attended a nurses convention (12,000 surgical nurses!)with my wife and I asked nurses from around the country about the surgical robot, thinking that these robots would be rare.......not so! Everyone had one and some large hospitals had multiples. Their concept was if you want your hospital to be taken seriously in the professional world of surgeons, you MUST own an Intuitive Robot. So now I own 100 shares, and I sure would like to see an improvement in our economy and healthcare profits. Yeah, what are the chances?

Hillary or Barrack in the equation? I don't even want to consider the implications!


On Apr 12 06:33 PM Donald E.L. Johnson wrote:

> I don't know whether my post on GE Healthcare, which I put on my
> blog and offered to SA about an hour before CNBC did the same story,
> will make it on to SA this weekend. But back on March 1 I wondered
> whether the muni bond auction market turmoil would cause hospitals
> to cut cap expenditures, and GE executives said it did and will continue
> to be a problem. A quick search of the conference call transcript,
> which was posted last night, shows how concerned Immelt is about
> the closure of a major plant by the FDA for 20 months. As the former
> head of healthcare, he's not happy with its first quarter results.
> How serious the GE Healthcare's problems are remains to be seen.
> A lot depends on how the credit markets shake out.

2008 Apr 12 08:11 PM

[User 177370:]

The bottom line is that GE stock hasn't done a darn thing since Immelt took over. His positioning strategy hasn't worked and the company needs a better head coach. Investors just don't get excited about him.

2008 Apr 12 09:25 PM

[jackooo:]

THE FACT THAT INSIDERS BOUGHT THE STOCK SHOULD TELL YOU SOMETHING! They know nothing...

2008 Apr 12 09:47 PM

[Donald Johnson:]

dtrend,
Historically, when unemployment has gone up, elective procedures have gone up. The reason: When people are laid off and are facing the loss of their health insurance, they get problems taken care of before they lose their insurance. I don't have any charts that show the correlations, however, so take this with a grain of salt.

These days, with employers having shifted more health care costs to workers, hospitals will have bigger collection problems as unemployment goes up. And workers may not rush to have procedures done if they think they won't have the money to pay their high deductibles. So there is a lot of uncertainty in hospitals these days, I suspect.

2008 Apr 13 12:46 AM

[bowlmar:]

GE infrastructure looks good, but the problem is that the LEASE their products. This helps the Ponzi pyramid in good times, but in slowdowns, they'll get killed because the leases won't get paid. They own most of those jets flown by bankrupt airlines.

2008 Apr 13 11:02 AM

[Oregonrain:]

I have not followed this stock as carefully as perhaps I should. It has always seemed like a "black box" type of thing. Very complex...not a ton of transparency. But, as it sells off it might be something to look at.

2008 Apr 13 02:20 PM

[notsosmart:]

im not a ge insider. im no insider at all.retired geezer.no info or charts.i say $29 is a good buy. in local paper the dart throwers won 2 weeks in a row over the brains.isnt this whole system great.

2008 Apr 13 03:13 PM

[jdubbins:]

Here is a couple points which in retrospect should have alerted the analysts let alone the management of a possible earnings miss.
1. GE is 7th largest financial services firm.
2. Problems in the credit markets are systemic and not just one firm's bad trade.
So the question the analysts/management should have asked was What made GE immune to the known problems of the credit market?

2008 Apr 13 04:16 PM

[Gross Bill:]

Who sold. That's what I want to know. There were 366M shares traded on Friday...doesn't strike me as some hot money jumping out after a near miss.

Maybe it was a fundamental revaluation by some pretty good sized holders. No? Could we see similar revaluations of other mega-corps (or a total market reval) this coming week?

Was this some "smart" money realizing that their "weak dollar," "2nd half-recovery," and "global infrastructure" themes will not be playing out.

2008 Apr 13 04:26 PM

[Dan Jacome:]

GE didn't cook the books (ie. manipulate earnings); they "massaged" them - BIG difference...

2008 Apr 13 05:22 PM

[Dan Jacome:]

JP writes:

"Remember this is a company where insiders were buying hand over fist 1-2 months ago... So how sharply did things slow that last month?"

This is always a sign for people like me to investigate a stock as a possible short.

"insiders" are wrong far more often than they're right.
---------------------

comment: Do you have some data; the academic pieces we've read suggest otherwise. In aggregate, insider buying-based investing produces abnormal returns & insider buying is more indicative of future stock returns than insider selling....

2008 Apr 13 05:25 PM

[johnnybigsp...:]

Wondering if GE is just doing their 'spring cleaning' here? If they have dribs and drabs of crappy quarterly numbers, or even some boat anchors in their closet, maybe now is the time to get it all out?

Could be clear sailing from here on.... tough to say how deep their problems are.

My guess is that if they were truly significant they would have alerted. I think they just cleaned house because its en vogue right now.

2008 Apr 13 10:51 PM

[Dan Jacome:]

"My guess is that if they were truly significant they would have alerted. I think they just cleaned house because its en vogue right now"

That's a fair point -- would be like a mini big bath, huh?

2008 Apr 14 01:20 AM

[ValueHuntr:]

My analysis puts worst case scenario for GE at $6/share and intrinsic value closer to $12. Amazingly, Infrastructure alone would be sold for more than $6/share under normal market conditions.

See:

valuehunter.wordpress..../

Mar 13 07:24 PM