Adding to My GE Position

Originally written on 6/13/08 and updated yesterday.

I added more GE yesterday (6/12/08) at $29.70 (and again on 06/26/2008 @ $27.58). Please note that my portfolio results will continue to reflect only my initial entry point, as it does with all stocks (for example, my PWE entry point is shown at $30.11 even though I no longer have any of the shares bought at that price).

During the big market dip last summer, I re-evaluated and tweaked my investment strategies a little. One of the adjustments I made was to avoid mega-caps (say anything above $100B market cap) but I am making an exception here for the following reasons:

• GE, on a cash flow basis, looks reasonably attractive.
• 4+% yield at current prices.
• It’s still only the second smallest position in my portfolio, which is highly concentrated.
• In a post peak-oil world (and yes, I gather/hope there will be a world after peak oil), GE is positioning itself as a major component of the solution. The small tech innovators have a role to play (and you’ll make a lot of money if you can divine who the winners will be), but make no mistake — solving these problems is going to take scale and it doesn’t get much bigger than GE.

My view is that GE is being unduly punished for embarrassing Wall Street by catching analysts flat-footed on that Q1 2008. That’s not analysis, just my opinion. Some off-the-cuff analysis tells me that GE’s financial arm may be a black box and a significant portion of earnings but it’s combined with solid growth businesses with worldwide reach and scale. If some people liken GE Money to a hedge fund or pseudo bank, then I’d view GE as a financial company with a substantial (and unconvential) deposit base — in this case, cash-generating businesses in infrastructure, energy, healthcare, media, etc.

One of the main knocks on GE is “earnings quality.” Analysts have knocked them over low tax rates and this past quarter, their financial engineering (or lack thereof). One of the complaints is that much of their other business comes from asset sales (some of which didn’t come off this past quarter, hence the Q1 disappointment) and so there is an aspect of uncertainty. But a quick look at the past 5 years shows that GE has averaged $22B in free cash flow. Keep in mind this is based on operations (FCF = OCF - CapEx). Tallying items classified as “sale of business” or “sale of fixed assets”, I get a 5-year avg average of $14.5B from these sales so it’s not as if GE is utterly dependent on exits to run their business. And if you are going to criticize GE as a pseudo-financial company, then apply that standard across the board. How many financials can borrow money with a AAA rating, have access to cash flow many levels removed from the credit crunch and don’t have liquidity issues to the same extent as other financials?

In this light, Jeffrey Immelt has already gone on record stating that GE will maintain its AAA rating and not need an external capital infusion. His credibility is strained now but if he’s wrong, the man is guaranteed out of a job. BTW, he’s also buying shares[$]. I still trust Immelt to deliver.

The current turbulence is just noise in a crazy market. In the intermediate to long term, GE will grow its business and increase its dividend at a steady pace. My quick DCF analysis shows GE is undervalued by at least 20%. Will this stock double in the next 2 years? Probably not but if they can get back on track, there’s no reason we won’t see $40 again in the relatively near future and if the market really tanks, you’ll get a chance to buy a nice dividend yield and wait it out. Even in a “post-American-superpower” world, GE will be a prominent player so we should have some cushion against the weakening dollar.

As always, YMMV. Do your own due diligence or consult a financial adviser.

Disclosure: Long

Comments

[Loxomo]

GE is simply the best run and positioned company in the US and the world and at 4.5% yield as of yesterday I recommend you BUY as much as you can afford-it's a double digit no-brainer in a year...And in the end, isn't this basically what it's all about, dbl-digit earning for us all! loxomo ps: This is one company whose dividends constantly increase too, year to year.

[phil sukalewski]

I fail to buy the claim that GE is a greatly run business - certainly the stock chart doesn't support this for the last 8 years. If all if the systems that Jack Welch put into place were so great, the company would have continued to increase earnings by 10% or more since he left; yet they haven't.

[Stockguy456]

The big, BIG problem I have with GE is the 547 BILLION dollar debt. The market cap is only 264 Billion. GE has been run into the ground and management is very poor! Expenses are increasing, revenue is decreasing GE is going to have to spin off the good businesses debt free and let the other businesses crash and burn!

[simplesimon]

This is a good analysis. This is a diversified company with global reach-addressing fundamental needs worldwide. I read each new blurb re. what GE is up to, and it all looks and sounds good to me, as each week goes by , another huge contract for this service and that 'bagged'. I can't buy any more right now, but I tell you I wish I could at these prices. As mentioned above, the price is low for one main reason - and that it is coupled to the all time low in consumer/equities investing confidence/sentiment deflation. When confidence is high, all ships rise; and vice versa, they can all fall with the tide, as these share prices indicate...but it's just the tide that is down...not this company with a tap into a number of cash streams all over the globe. you name it , GE is there raking it in, and setting itself up to rake in more; while blowing off the stage any upstart wannabees in the process.

[capgain]

Davy:
Your assessment is valid, if a bit tepid. Most investors (especially the "professionals&qu... are mentally lazy lemmings who run to follow the crowd. Just as you have disclosed what part GE plays in your portfolio, I am happy to do the same.......it is my largest single holding by far, and has been for the last 40 years, and the lemmings who sold yesterday sold to......me.

Having made clear that I value this as a smart investment, let me be fair and opine that GE is a sub-$30 stock now for two identifiable reasons. The first is cited above.....the lemming factor. The second is a consequence of its timidity years ago. For those readers who have a fair recollection of history, think back to GE's attempt to buy Honeywell. This was an acquisition that rivaled sunshine in its brilliance. And GE backed down in the face of protectionist EEC opposition! When the EEC said "Tut, tut" and "Nein, nein", GE said "Uncle" instead of "#@^& you" and that was the beginning of its slide toward $30. (Are you listening, MSFT?)

It continues to both amaze and disappoint me that the powerhouses such as GE, MSFT, and UTX continue to knuckle under to the lilliputians and the tree-huggers to their own detriment.

Now fast-forward to today, and you will see why GE is still a good investment. Who is taking the lead in developing potable water, wind-generated power and fuel-efficient engines? Right! Now if only they would also focus on fuel cell technology, the obvious answer to our imported oil morass.

Davy, continue to tell it like it is......and don't be afraid to be right!

[INOROUT]

I TOO AM AN OWNER OF GE. I ENTERED AT $32 AND YAWNED AS IT RAN UP TO $41. I BELIEVE IN THE NEW BUSINESS' THAT IT IS ENTERING AND THE LIQUIDATION OF " OLD LINE " DIVISIONS. THE FLY IN THE OINTMENT IS GE CAPITAL. NO ONE REALLY KNOWS WHAT THEIR EXPOSURE IS. EVERY FEW MONTHS WE GET DOWNWARD RIGHTOFFS FROM THE FINANCIAL INSTITUTIONS. IS GE ANY DIFFERENT OR ARE THEY BEING UNREALISTIC REGARDING THEIR LOANS ?

[gaucho420]

I agree with Mr. Bui and I've been doing the same thing.

[TA]

Ditto

[jegan ;-)]

Why buy it on the way down? Why not wait till the Weekly Stochastic moves up past 20?

Thx jegan ;-)

[The Hammer]

No sales or earnings growth?

GE has grown in sales 2007 - $245 Bil -- 2003 - $146 Bil

earnings have grown 2007 - $2.17 --- 2003 - $1.54

Dividend growth --- 2007 1.15 ----- 2003 - .77

GE sold their sub-prime mtg business last year
GE money delinquencies running 5.48% last qtr. in line or slightly better than others.

[pennystocks2008]

Catching a falling knife! The Dow will plummet at least another 1000 pts. if oil continues to surge and Israel strikes against Iran. GE is a good investment, but the stock will be much cheaper a couple of weeks from now.

[BS Detector]

pennystocks - wanna bet?

"The big, BIG problem I have with GE is the 547 BILLION dollar debt. The market cap is only 264 Billion..."

First, I think you misplaced a decimal - GE's debt is on the order of $54 billion. But so what? GE also has $145 billion in assets.

"GE is going to have to spin off the good businesses debt free and let the other businesses crash and burn!"

The sky is falling! The sky is falling!

[busybeaver]

This is one of the few U.S. corporations with global span still dealing with Iran. I've defiinitely got some reservations about adding to my position as long as this continues.

[Daniel Jacome]

amazing company, bad stock. There is a difference -- there is ZERO institutional accumulation on GE right now, you could probably get a cheaper price tag on the stock near term....

[khwender]

Daniel above is 100% correct, great company, poor stock.

[User 150357]

I think most of you have gotten this wrong. 25% of GE is GE Capital.
THey have $5 bil. of mtgs. in the UK. I do not know the amt. of mtgs. they have in the US. No one but no one wants to buy their GE credit card division.

Credit card division is rife with defaulting holders.

As far as I'm concerned this is a black box or the unknown. No one knows the depth of losses any of fianancial companies will be having going forward. What makes all of you so confident in GE Finance financial picture? WHere is the transparency? Does anyone know how much unsalable paper they are holding.

In my opinion, one can only invest in this co. if you can get a clear and true picture where the paper is and what kind of paper they have.

Meanwhile, the stock is down over 8% over the last ten years. It's pretty difficult to make a dead horse stand up.

Cheap doesn't always equate to good. If you want cheapoo's I can recommend other ones for you also, C,F,GM,CMGI, etc.-there are many dead horses that are going for cheap.

[aceemily]

busybeaver is right. If GE is so strong, why would they accept the embarrassment of doing business with Iran for the few lousy bucks that business brings in. GE is GM. GE is TimeWarner/AOL. Even Jack Welch has started castigating Immelt. Sell now or when Immelt slinks away and a real leader takes over.

[Nixie]

If your an investor, do you due diligence on GE. My opinion means little in the scheme of things however if you buy GE at this price I believe you will be rewarded. The negative touts are probably short sellers looking to make a buck. Yes I'm buying and not looking to make a quick buck. 2009 will soon be here and the shorts must replace their holdings all the while you'll get a great dividend..

[Brahm]

GE is an excellent company, especially for innovation. However, GE is so large in size that no innovation or improvement here or there is going to make too much difference to its outcome or growth. The second point to remember is that GE is difficult to value, since even during Jack Welch's stewardship it was more image and salesmanship that carried it to the value of about $50 rather than the earnings pace. Third, after all is said and done I had heard/known a while back that about 40% of GE used to be the financial sector. Good financial companies are generally priced at a P/E of about 12, instead of 17 or more. Four, GE has some pretty backward divisions (e.g. appliances) which are just passe in comparison to other independent appliance manufacturing companies. I would not value appliances at P/E 17 or more.

In conclusion, even though I think GE is an excellent company, I will not invest in it just yet. I will watch the market and other developments with regard to GE and its activities. I will consider deploying some money into a GE investment, when I consider there are developments with respect to the company which will make significant difference to its growth potential, or when GE makes an innovation which has terrific potential for ioutlook. on its income.

[mygoals]

just out of curiosity, if GE were to spin off some of its subsidiaries, would present stockholders get shares of the new company? i ask this question only because as a stockholder of mcdonalds i was and continue to be royally pissed off that i didn't receive a penny from the chipotle mexican grill spinoff. any thoughts out there?

[grampz]

Evidently, it doesn't bother you that GE's stock not only continues to go down, but they continue to do business with Iran.

[oldtrdr]

mygoals.....it all depends on how GE choses to exit any businesses. Have been reading lately, that GE's appliance business is "for sale", and a large Chinese mfg. is giving it a hard look, as are some other firms (possibly PE firms, as well as "strategic" acquirers). In such an instance, current shareholders get zip.

[SanFranciscoJim]

I am having a tough time understanding why GE is so cheap. It is trading at a P/E of 12, not 18, btw. I have recently bought 100 more shares and will soon buy 100 more.

[The Hammer]

GE finance has about $30 bil in credit card receivables in US....a 10% default rate which is historically really high= $3 Billion. Barely a dent
GE this year will make about $23 Billion in FCF---dividend is 12-13 billion leaving 10 Billion cash.
.

GE has about 75 Bil in mtg debt from UK Australia and NZ.
Lets give it a default rate of 5%or $3.75 billion. 80% LTV mtg on avg. GE originated all mtgs meaning some greedy dumbass mtg broker did not fudge the numbers.

GE capital is not a blackbox.

GE sold sub-prime mtg business in 2007. They hold $1.6 bil in sub-prime mbs.
Guidance $2.20-$2.30 probably $2.20 imo.

Market probably over did it, but 2009 earnings is being factored in as maybe another flat year.

[glenn777]

Suitors Drop Out Of Auction For GE Card Unit

Suitors are dropping out of auction for GE's $30 billion credit card unit. Had GE tried to sell that card unit 2 years ago there would have been 10 banks chomping at the bit to pick up that portfolio. Now, no one wants it.

globaleconomicanalysis.../

[The Hammer]

Obviously GE should have sold it in 2006 but they did not. Noone will buy it now. This is a given.

So they have $30 bil of exposure. Like I said earlier 10% default rate on $30 bil is $3 bil. 15% rate is $4.5 Bil. 20% default rates then you have $6 billion. I would think 20% would be the worse possible case scenario. Not everyone out there is a freeloading homedebtor.
GE will make about $23 bil in fcf this year and about $10 bil after dividend payout. plenty to cover losses.

[tessant]

i call GE my safe alt energy play. at these levels, a long term investment seems like a no-brainer.

scott
windfeeds

[mkreisel]

Some clueless Jack Welch worshipers forgot that he was lucky to lead GE through the greatest bull market of all time, in which GE's P/E ratio expanded from 8 to the astronomical 60. Then he handed over the reign to the next hapless guy. Regardless how his successor has been performing operationally, no stock will perform well if the P/E went from 60 to 12.

Retails, they never bother to learn the facts.