GE: More Bad News to Come?

GE (GE) is due to announce its second quarter results in the next few weeks; so what is the outlook for GE? 

In the first quarter, GE had a nightmare set of figures, whereby the only division doing well was Infrastructure. Discounting the Broadcasting Division (as too small to significantly affect the figures), how will the other divisions perform? 

Financials: 

It must be pretty obvious to most investors/analysts that sentiment has changed against GE over the last quarter (as of this moment the share price is $28.50), and some analysts on Wall Street are now starting to downgrade the stock. If the CEO acts correctly, he will have to write down a lot of assets from the Financial division, especially those regarding Commercial Real Estate. 

The GM tower in NY was recently sold for $2.8 billion though it was originally valued at around $3.15 billion, a discount of  about 11%. If this is a benchmark for Commercial Real Estate in general, then write downs could be very large. As a small example of this, GE itself,without its loan portfolio, has real estate assets of about $57 billion, a write down of 11% is about $6 billion. 

Health: 

The figures in the last quarter were poor, and I do not expect them to increase significantly. 

Industrials: 

This segment reported poor results in the first quarter, and apparently the GE management is keen to offload part (or all) of this division. This does not bode well for its performance in this and subsequent quarters. 

Infrastructure: 

This is the ONLY division that performed well in the first quarter, but there are problems ahead, lets take a look at the division in more detail: 

Wind/Solar:

Should keep performing very well, with the oil prices expected to remain high 

Aero Engines:

Potentially a disaster waiting to happen. High fuel prices are really hurting the aviation industry. Planes are being mothballed (and mothballed planes do not require spares). The average engine age of the GE aero assets is older than that of Rolls Royce, so it is likelier that they will be mothballed first, as newer planes are more fuel efficient. On top of this, new planes on order may be canceled (they tend to have options on most, which can be canceled) therefore engines may be canceled, with the negative effect on this section. 

Nuclear:

GE appears to have fallen behind Areva and Toshiba (TOSBF.PK) in the international pecking order; even in the US, GE is losing out to the other companies. 

Locomotives:

With the high cost of diesel, inflation worries and economies slowing, you can expect orders to begin to fall, in the near future. 

Turbines:

They should perform well, but there is a lot of competition in this field, and success cannot be guaranteed. Also, turbines for new power stations, may start to drop off, if economic growth continues to slow. 

Water and Others:

This section should do well, regardless of the economic situation, as all developing countries require potable water, so water treatment etc. should continue to outperform.

I do not think that the CEO will write down to the required degree this quarter, as doing so may mean the CEO falling on his sword. It would not surprise me to see the figures “massaged” to lessen the true extent of the current problems until the economy starts to turn. However, GE is definitely in the spotlight and analysts will be digging into the figures to try and find the hidden skeletons. It may well be the case that the share price rises on the released figures, only to go into decline when the figures have been fully assessed. 

I am pretty bearish on GE currently, as I have been for about 5 months, and I worry as to whether this conglomerate can carry on with its current structure. Splitting the Financials away from the rest may be the best course of action, in the long term.

I have no interest in GE to disclose.

Comments

[Goody]

To some aspect I agree with the author however I do disagree on a couple of items. The aero industry has historically followed a 10 year cycle with 2-4 down regard less of what’s happening with airlines. I believe as it has been in the past that airlines will park/scrap older aircraft due to the high cost of upkeep especially Jet-A and Jet-B. This means in order to stay competitive the airlines shall need newer equipment that is more efficient, hence Ge’s GeNX. The same bodes well with the locomotive section, new engine are vastly more efficient that older ones. The big key item is there are plenty of buyers outside the US that are willing to pick up newer more efficient equipment especially with the Cheep dollar. I do agree that this could be a troubling year as with most big companies, however GE is a long buy. Not to mention that right now at a 4.2% yield it’s mighty tempting to pick it up given that they increase the dividend every year for the past 20 years!

2008 Jun 17 05:39 AM

[ralph mccdonald]

Bring back neutron Jack!

2008 Jun 17 06:25 AM

[rbinnh]

Or this could be a great opportunity. The one thing that GE will not do is cut its dividend. And they won't have to, since although profits will fall, they will still be very profitable. At the current price, the yield is well in excess of 4%. That's a pretty nice yield to buy and hold the most sterling, diversified, and best run blue chip on the planet for a few years. And GE is well positioned for the future in terms of alternative energy, fuel efficient jet engines (surviving airlines will have to go fuel efficient), financing, etc.

Compared to other investments, it seems pretty low risk/high reward to me.

2008 Jun 17 07:30 AM

[jdubrox]

This article appears to be very nearsighted. In order to be taken seriously, command of proper grammar and spelling is a must. Specifically, your Aero Engines section could use some work. "Effect" and "Affect" do not mean the same thing, nor are they even the same part of speech.

Talk about written on a whim...

2008 Jun 17 08:50 AM

[Cora1]

It is apparent that some things are not going very well at GE at the moment. However, are things as bad as the share price suggests? On a Euro basis (rather than in USD), the stock trades currently lower than in 2002, and we are talking a company with a major share in turnover and assets outside the US, and with some US assets that deserve a far higher multiple than what is paid for the group as a whole.

2008 Jun 17 08:56 AM

[jimmy smith]

don't forget international sales. the Arabs and Chinese will be buying planes, trains, energy and infrastructure for the next 20 years - GE will be a major provider.

also, note that any real estate write downs are paper losses only. when the market improves (which it will eventually!) they will have to be written back up.

we should thus focus on operating results. all the other stuff is accounting b.s. in fact, new accounting rules are part of the problem we are now facing across the board!

2008 Jun 17 08:57 AM

[haphap11]

Whomever wrote this is a complete idiot. Why do they even publish this garbage? Like anyone on earth cares what Chris Marshall says! I'd sooner take advice off my 8 year old daughter, she is more articulate and at least knows the difference betwwen "affect", and "effect".

2008 Jun 17 09:59 AM

[pennystocks2008]

I hope your bearish outlook is justified. That means that I will be able to pick up these top-quality shares at even lower prices. Over here in Europe, GE shares trade at levels not seen since 1997 - due to the weak dollar. What a shame that the dollar rebounded a little bit since its mid-March lows.

2008 Jun 17 04:13 PM

[romoho]

haphap11, I got a kick out of your first sentence:"whomever wrote this is a complete idiot." You were, of course, referring to your own sentence. Very clever. PS, I often use stop losses; especially in today's volatile market, but I have placed none on my GE shares.

2008 Jun 17 09:29 PM

[djasking]

Many of the obvious counterpoints are covered in earlier reponses.
In general the analysis is one dimensional. According to Chris the value of a $57 Billion real estate portfolio is supposed to be infered from the sale of one building which was bought at the peak of the real estate boom. Meanwhile, there is no reason to think GE's historically conservative managers used marks that in any way reflect this boom and bust. The reality of the financial division is that conditions are tough, earnings will be strained, but there has been marked improvement since March regardless of whether a landlord in NY went bankrupt.

Yes, locomotives face high fuel costs, but meanwhile the rails are going gangbusters as they benefit from the trade-off from truckers. Again, there are ecenomic challenges, but not exactly the nose dive the SP and analysts suggest.

Yes, indistrials were weak, and this will probably continue, but we are supposed to expect especially dissapointing numbers because management is interested in selling the appliance unit?

Yes, airlines face serious challenges, but the weakness is exagerated here in the US. The average age of the worldwide fleet is getting up there (don't have the figures in front of me), but weakness in the US harly amounts to a disaster waiting to happen when you see the orders coming from UAE, Korea, China, etc. Another post also pointed out the fact that airlines are trading old gas guzzlers for new efficient models.

While I understand the motivation for the recent downgrade, they simply didn't see a compelling reason to rate GE outperform anymore (read 1-3 quarters), but for a certain type of investor GE is ideal: strong & safe dividend, poor investor/analyst sentiment, attractive valuation, and ultimately significant value may be unlocked by restructuing the portfolio over the next several years (the obvious step to begin this process is selling industrials to strategic acquirers, the next would likely be spinning off media after piecemealing certain assets).

2008 Jun 17 09:54 PM

[gordo]

This article is very anecdotal and superficial...I dont see where there is detailed insight...one thing for sure GE has a large financial division that wont do well in the short run but we dont buy stocks for the short run...my guess is this may be time to buy some GE...but why buy GE when one can buy PG and KFT ...

2008 Jun 17 11:03 PM

[philo_alpha]

The problem with GE is that it has grown very large... and large behemoths always become inefficient and slow moving. GE might be the fastest mover of the behemoths, but it might still be outwitted by medium and smaller companies.

The good thing with GE is that it has invested in new technologies and industries, though unfortunately mostly through acquisition. If these units survive their acquisitions and continue to be productive, then GE will resume its growth.

The two immediate obstacles are of course the financial and real estate divisions. If these blow up (or if these already have blown up and we are yet to hear about it, not necessarily this quarter) then a higher cost of borrowing coupled with limited access to the credit markets (that would be a new one for GE) would spell game over to the conglomerate in its current form.

Not a zero risk stock anymore.

2008 Jun 18 01:06 AM

[jayhay]

Except for the "affect" - "effect" english glitch, I agree with alot of Marshall's comments on the GE stock. Jeff has done very little to position the company for today's economy, which alot of stock market analysts are saying. He had promised to get rid of alot of financial and real estate holdings which evidently has not happened. He has miscalculated the 1st qtr earnings which has cost stockholders $5 a share or more. Now he is putting up the appliance division when nobody wants it and if sells will go at a reduced price. I had been told by analyists when Jack leaves and Jeff takes over, get out of GE stock. Unfortunately, I didn't and but I am now a believer. The board needs to make a CEO change and quick before Jeff pulls this once great company down to a nothing corporation.

2008 Jun 18 03:26 PM