@VIC: Jeff Matthews on Evaluating GE- What Would/Did Warren Do?

Todd Sullivan attended this week's Value Investing Congress on behalf of Seeking Alpha.

After my recent purchase of GE (GE) and what Berkshire's (BRK.A) Warren Buffett did days later, this presentation intrigued me from the day I saw it. Matthews runs RAM Partners LP, and is author of this NEW book:

 

Evaluating a Company:

• Read every report and Chairman's letters
• Is it a good business, do I understand it, does it have a moat, does it throw off cash?
• Is management good, honest, do they manage for the long term?
• Is Board aligned with shareholders?
• What is stock worth, what is it priced at today?
  
  

Rather than seeing price first and then evaluating, Buffett looks at the company first and figures out what he thinks it is worth. He is a fan of CNBC's Jim Cramer (my note.....Cramer is a fool).

GE does business in (in descending order of revenues) infrastructure, commercial finance, GE money, industrial, NBC universal, healthcare.
GE "core competency" is the recruiting and training of the world's best people according to Jack Welch in 2000 Chairman's Letter.

GE Capital's business and ratings is stable and NOT at risk. The company bought back $25 billion in stock 2005-2007 at average price of $35. Recent offering of $3 billion was at $22.

GE has had a falling tax rate from 30% in 2000 to 15% in 2007, inflating the net earnings number.

GE Culture (+ means "good" and - means "bad"):
+ Numbers + values = good manager
- numbers - values = gone
- numbers + values = eventually gone
+ numbers - values = hardest to part with

The "lowest common denominator" of manager at GE "makes the numbers".
Institutional imperative: "Companies do stupid things because they can". This led GE to get into the mortgage business by pursuing this "growth" and GE caught the mortgage problem.

In short, Matthews was not very encouraged by GE. Matthews did point out accurately the pitfalls of Immelt being the "guy who followed THE GUY" who was Jack Welch. The same holds true for managers in sports, or of any business.

If he was in charge of GE, he would keep Immelt there and change the board of directors and alter expectations. Immelt ought to focus on core business and not worry about numbers.

Matthews thinks the GE deal was a bit of a "please do this" scenario and points out that Buffett did not take a 9% stake like he did in Coke (KO) and American Express (AXP) .

Disclosure: Long GE

Comments

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Three articles at Seeking Alpha requires a response

@VIC: Jeff Matthews on Evaluating GE- What Would/Did Warren Do?
GE Looks Very Attractive Here.
Why Is Everybody Selling as Buffett Is Loading Up?

This whole Buffett transaction speaks to the questionable health of GE. Buffett is buying $3 billion of preferred shares of GE, with 10 % dividend, and an option to buy $3 billion of GE common shares for $22.25 at any time over five years. Who would not take a deal like that?

People - that includes analysts - are not stupid. The following events show that there are fundamental problems at GE.

+ Where GE had an unquestioned AAA rating - GE was buying its money at AAA rates, it's now paying 10%. The marginal / disappointing performance since Q1, puts into question GE managements' repeated statements - "we are protecting our AAA rating."
The.

+ Where GE purchased in recent years some $25 B of their stock at a price of about $35, it sold $547.8 million shares priced at $22.25.

+ Where GE was known for its predictability and stability of earnings - it is known for unforeseen disappointments. An analyst recently reduced his earnings forecast for GE for 2008, 2009 and 2010.

+ Where GE was increasing dividends annually - it's now stopping dividend increases that went back to the ‘70s.

+ Where GE was a picture of stability and growth - it now has to placate talking head analysts by divesting divisions at the bottom of a market, and give the appearance that something productive is taking place.

+ Where GE was a picture of stability and growth - the continuing cataclysmic stock price dive in the past year together with the relentless stock price slide in the past 5 years.
Please see the following chart on GE and tell me what you like –
clearstation.etrade.co...
There appears to be no bottom to this decline in GE. It just broke The $20 mark – below a multiyear bottom of the early 2000s.

Some questions that should be asked during these times about the future of this company?
1. Q – What would be the outcome in the price of GE shares if the AAA rating were to drop one notch in the near future?
2. Q – What will be the repercussion to the price of GE stock if there is an earnings ‘disappointment’ below the low end of accepted levels?
3. Q – What will be the repercussion to the price of GE stock if the CEO and the CFO were asked to leave?

2008 Oct 08 01:43 PM

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this is one of those scare everybody out while smart money buys. GE isn't going anywhere.

2008 Oct 09 08:00 PM