A Look At General Electric, By The Numbers

Summary

• GE shares have been on a downward trend since the beginning of the current year, and the long-term trend is nothing to write home about either.
• In this article, I want to spend a few minutes looking strictly at the numbers (i.e. GE's operating results and financial position).
• There are reasons to be bullish, but every investor needs to determine if they are willing to take on the risk (and there is definitely risk involved).
• GE is a long-term buy at today's price, even with the risks factored in.

It was recently reported that General Electric (NYSE:GE) shares had their worst weekly drop since March 2009 (yes, since the Financial Crisis), as shares finished the week down almost 13%. Moreover, GE is the worst performer of the Dow in 2017 (down almost 35%), and the picture looks just as bad when you widen the lens.

(Source: Nasdaq)

My thoughts about GE as a long-term investment have been well-documented here on Seeking Alpha, so instead of trying to prove my bull case, I want to spend some time looking strictly at the numbers. However, at the end of the article, I will explain why I still consider this storied industrial conglomerate a long-term buy.

A Look At GE, By The Numbers

As described in this article, GE reported Q3 2017 results that left investors wanting more. The company reported Q3 2017 adjusted EPS of $0.29 on revenues of $33.5B, which was a bottom-line miss but a top-line beat.

(Source: Q3 2017 Earnings Presentation)

In addition to reporting poor operating results, the company also reset its full-year 2017 guidance to a range of $1.05-$1.10 (down from ~$1.50). However, as I described above, I want to focus on the numbers in this article, so let's start with GE's top-line growth and industrial margins.

(Source: Data from GE's Q3 2017 Earnings Press Release; table created by W.G. Investment Research)

Note: The Oil & Gas segment was impacted by the Baker Hughes merger, and the Lighting segment now only represents GE Lighting and the Current division (Energy Connections now rolls up to Power).

Observations from the table:

• GE's top-line grew by 3% YoY with Renewable Energy leading the charge (O&G was aided by the Baker Hughes acquisition).
• Power was not the only segment that reported poor results for Q3 2017, as there were three other business units that had double-digit YoY profit declines (O&G, Transportation, and Lighting).
• The company's industrial operating margin came in at 13.3%, which was down big from the 14.4% reported a year ago.

Simply put, the struggle is real. Mr. John Flannery, CEO, and team have a lot of work to do in the quarters/years ahead but I believe that they have some great assets to work with. To this point, management already announced that they are looking to get rid of $20B worth of assets over the next two years, so let's get a little creative for a few minutes. I believe that Baker Hughes, a GE Company (BHGE) should be the first to go, but there are also rumors that GE is floating the idea of spinning off (or selling) its Transportation and/or Healthcare assets (plus, the Lighting segment was already put on the trading block). Therefore, I created the table below to show investors what Q3 2017 would have looked like if these segments were not under the GE umbrella.

I now present to you the "new and improved" GE:

The takeaway: GE's industrial profit margin would have been well over 100bps higher if these segments were not a part of this storied conglomerate. It is hard telling what type of demand there will be for Transportation and/or Lighting - the O&G assets are already well-positioned for a spinoff and, in my opinion, the Healthcare assets will be easily moved - but let's also remember that spinning off these assets is always an option too. This analysis does not paint an entire picture for what a less-complex, more streamlined GE would look like (i.e., what new share count would be, what the selling prices would be, how much value will be created with spin offs, etc.), but, in my mind, it shows that sometimes bigger is not always better.

(Image Source)

Financial Position

Next up is the company's financial position as of September 30, 2017:

(Source: Data from GE's Q3 2017 Earnings Press Release; table created by W.G. Investment Research)

* Borrowings does not include any other liabilities so please review the Press Release for further insight on the company's true financial position as of the period-end. Furthermore, the borrowings amounts do not factor in the inter-company eliminations for the period (see page 7 of linked Earnings Press Release for further detail).

Observations from the table:

• GE Industrial's cash position has improved over the last three quarters (cash and cash as a percentage of borrowings has increased).
• GE Industrial's borrowings are up 6% while GE Capital's borrowings are down 17%.
• The company's total borrowings are down 8% but the total net borrowings balance is only down 1%.

GE's financial position is nothing to brag about, but, in my opinion, it is not as dire of a picture as the bears would have you believe either. Plus, GE has a good credit rating so the company has the ability to increase its financial leverage, if need be.

Valuation

The company provided the following update to its 2017 Operating Framework:

(Source: Q3 2017 Earnings Supplemental Report)

There is no doubt that GE's long-term story was recently stretched further into the future, but I still believe that there are legitimate reasons to like this company at today's price. Based on current year estimates, GE is now trading more inline with its peers.

GE PE Ratio (Forward) data by YCharts

GE does not deserve to trade at a valuation similar to Honeywell (HON), in my opinion, but it is important to note that GE's 2017 estimate factors in several significant short-term headwinds that the company is contending with. Therefore, GE's current valuation does not tell the whole story if you are willing (and able) to look out past 2017, of course, in my opinion.

Bottom Line

GE is one of my largest holdings in the R.I.P. portfolio, so I am without a doubt talking my book. However, I recently added to my already overweight position so I am putting my money where my mouth is. I do believe that GE shares are pricing in the possibility of the dividend cut, but no one truly knows if a dividend cut is fully priced in at this point in time. As such, there is a real chance that GE shares could see the high teens in the weeks ahead. But I am OK with that because my GE investment is not about 2017 but, instead, it is more about 2018 and beyond.

Based on a review of the numbers presented in this article, there are reasons to believe that GE shares will trade higher once Mr. Flannery is able to communicate his long-term story for this company. Furthermore, the uncertainty related to the dividend has created a great deal of downward pressure for GE shares, so November 13 will be management's opportunity to create a new narrative for this company. GE's path forward will be a lot clearer after the Investor Meeting, so investors that have a time horizon longer than two-to-three years should seriously consider adding GE to their watch lists and use pullbacks as opportunities to layer into a long position.

If you found this article to be informative and would like to hear more about this company, or any other company that I analyze, please consider hitting the "Follow" button above. Or, consider joining the Going Long With W.G. premium service to get exclusive content and one-on-one interaction with William J. Block, President and Chief Investment Officer, W.G. Investment Research LLC.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are long GE, BHGE, HON. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.