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General Electric: The Recent Report (Rumor) Was Music To My Ears

Apr. 13, 2018 1:31 AM ETGeneral Electric Company (GE)104 Comments
WG Investment Research profile picture
WG Investment Research


  • The Wall Street Journal reports that General Electric may evaluating unique options to dispose of major business units.
  • When the company reports its Q1 2018 results, I want to hear more about management's "new" capital allocation plans.
  • I plan to stay long General Electric. Should you?

It was recently reported that General Electric’s (NYSE:GE) management team is now considering several options to dispose of major business units, which could include spin-offs and/or “hybrid” deals with other companies. There are also rumors that the Transportation division could soon be spun off into a separately traded public company. All of this news is music to my ears (more on this below), and the only question that I really have now is, “What took so long?” Since the company’s 2018 Investor Outlook meeting, GE stock has been in a free fall and has significantly underperformed the broader market.

I believe that most (if not all) of the downward pressure for the stock was a direct result of the uncertainty related to what this once-great industrial conglomerate may look like in the years ahead, which is the main reason why I am so encouraged about the recent news - remember, where there's smoke there's fire. In my mind, the company’s path forward is slowly starting to become a little clearer.

Does this make GE shares a buy? No, not necessarily, but it does somewhat change the narrative - that is, major asset sales/spins should be considered positive developments. Let’s take a moment to consider where this company has come from before we jump into where it is (may be) heading.

Where Did "We" Come From? The Same Old Story

Looking back, General Electric's downfall was actually well-telegraphed and should have been easy to avoid (this is me kicking myself). GE was known as the master of managing its earnings, as shown by the fact that the company beat estimates in 7 out of 8 quarters from late 2015 to mid-2017.

Source: Fidelity

The writing was, however, on the wall, of course, if you were willing to factor in the company’s

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This article was written by

WG Investment Research profile picture
Our President and CIO is a CPA with experience in public accounting and the financial services industry. He earned his Master of Accountancy degree in 2008 and his B.S. in Business Management in 2007. He is also a Level III CFA candidate. He has been intrigued by the market from the start. Over the years, he has learned that long-term investing is a discipline that, if followed, will help contribute to building lasting wealth. As such, most of our articles will be about the investments that we plan to hold for at least 3 to 5 years, as long as the company's story does not change. As a Seeking Alpha contributor, our main goal is to write about the companies that are key to our portfolio with the hope of promoting discussion (for or against the investment) from others within the SA community.Please visit our website for more information about W.G. Investment Research LLC.

Analyst’s Disclosure: I am/we are long GE, HON, UTX, BRK.B. 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.

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Comments (104)

WG Investment Research profile picture
It appears that GE may soon be disposing of the Transportation unit: https://usat.ly/2GAVG3p

People who still own GE. Bonds downgraded. Forget the number one rule. Never love your stocks because they will never love you back
Maybe it’s me but I read the first quarter presentation by the CFO and the CEO and the subsequent questions by the so called f”financial experts” and wasn’t greatly impressed by either. The report was better than the generally pessimistic street estimates, which as I wrote in a previous comment to another SA article, I expected. That of course was a good result. The presentation was, it seems to me much too general and had a notable dearth if specifics in the problems associated with the Alstom acquisition. We were led to believe that the company was buying Alstom to gain market share, that there was upside potential in the margins of their fielded base maintenance contracts and that ithe acquisition was to be accretive in 2016 and beyond. if the presentation addressed these projections, I missed it. Further, despite a big upswing in locomotive orders and a significantly profitable business, GE still intends to sell the business.
The questions from the analysts were in my opinion soft ball questions including Tusa’s. No one asked anything about what has been realized in the IofT thrust against the still held projection of a 12B new business by 2020, what the +companies intentions are in Additive manufacturing especially given that the stockholders meeting is to be held in an additive manufacturing demonstration facility. In short no questions, nor very little presentation was revealed about any new product pipeline or thrust. The promise is that a three year plan will be coming in June. We shall see, but again the detail is coming in the future.
Sighcopath profile picture
GE beat lowered expectations. This is GE the real surprise was that the beat wasn't by $0.01! 3 months after GE divisions go up for sale they only have $1.5 billion from a health care division. Thought health care was a core division. Looked into it and somehow this division is now an Internet of things division associate with health care? GE supposedly sold off European lighting and another lighting division but I didn't see where GE talked about that or how the proceeds were used. It is possible that all these deals won't close until 2H18 so maybe there is no cash and no sale yet. Sorry but still too much uncertainty with this stock to think the worst is over. Want to know my real reasoning check my comments on other recent posts about GE! Still shorting this dog!
WG Investment Research profile picture
"Sorry but still too much uncertainty with this stock to think the worst is over." <- Legitimate concern, Sighcopath.

GE great Q1 report that will change many analysts outlook going forward. More work to do but management team looks well focused!
WG Investment Research profile picture
I agree, rockjcp!

It’s sad to see a once American giant crash like this, this will pop or sink from dumping or a short squeeze. Traders just want to pounce, once earnings pass the stock will float around no where.
Boilermaker_KK profile picture
Still can’t believe how many blogs are published and how much attention is spent on GE on SA. I am amazed. Even more so than Amazon.

Really? There are so many companies out there to dissect and discuss yet here we are again with GE.

I’m long GE. It will get better, I think, but it it will be a long time before we get back to my $18 cost basis. Too stubborn to sell and it is a relatively speaking minor position in my holdings. I use it as a placeholder to remind myself about everything I shouldn’t do when making a equity purchase.
Qniform profile picture
Looks like you comment on all of them (and little else) Boiler.
Boilermaker_KK profile picture
pithy reply. nice. looks like you do too, except with more fervor and tenacity than i can ever muster. impressive >5300 comments! keep up your loquacious spirit.
No more major surprise negatives unveiled next Friday and in July will continue to help build confidence that the worst is over for GE for sure and IMHO is the most important thing that we need to see over the next few months. Evidence of continued sustainable slow steady short term positives at Power would rank second.
Spekulatius profile picture
LOl, no major bad news until next Friday (earnings report) is probably an instant classic.
Like I wrote last time these people have cash problems now they’re trying to raise money by selling off all their assets because it out right buyer at full price they can’t find the earnings announcement it’s gonna be another right down more winter the sale keep your GE feel like it you can triple up at five
Spekulatius profile picture
Splitting up is hard, since the liabilities (pensions, SEC investigations, debt, GE financial) will have to be split up too. GE cannot really afford to spin my free and clear, like they did with BHGE (which wasn’t a spin-off technically) because the burden on the remainder would be even higher.

After accounting issue were discovered in GE financial and GE power, I am wondering about pot. Issues in GE airspace as well. The cash flows in GE airspace are lacking, etc GE has shown neat and tidy earning increases in each of the few years. Given the fact, hat the se earnings are non-cash due to assumed profits from service contracts in the future (discounted to NPV), I would no be surprised, if GE bean counters are aggressive here as well and have shown larger earnings than is warranted.

if GE airspace earnings need to be restated, I am fairly sure, we look at a single digit stock and I don’t think $5 per share is out of question either.
Yes I sold all me GE. Started at 35 fFrom 35 down
James Coleman profile picture
As we all know, Q1 results will be out 4/20.

However, in light of Friday's after hours info, I believe GE will pre-announce some key items prior to 4/20.
The problem with cutting the fat is that presupposes that the management knows how to do it without essentially destroying the company. For example, getting rid of all its consumer product businesses for the reasons given, like non-core or not enough margin in exchange for buying an Alstom or joint venturing with BHI or making large investments in a gigantic windmill for possible profit 3 years from now, seems like fat replacement,
RickJensen profile picture
I think the problem has been fired. I suspect the front line people will know how to recover from "Worst CEO in history". They just needed clear air. And now also time.
WG Investment Research profile picture
Old Wizard,

You raise a valid concern (re management's ability to split up the company w/o destroying it) but I have more faith in them getting rid of businesses than I do seeing if they can turnaround operations. To clarify, I want to hold positions in the potential stubs, especially Transportation and Healthcare (if it happens), but IMHO the value that could be created long-term by splitting up the company outweighs the potential mistakes that could be made during the restructure. Again, just my 2 cents.

I don't think GE's shrink to grow strategy is working very well. Maybe
a grow sales and margins and shrink liabilities could work if it's not too late. It's a nose to the grindstone strategy. Unfortunately management likes to swing for the fences and are running out of innings.
Ptstanford. My friend was the one who figured cash for clunggrrs to stimulate the auto industry. Obama does not have the mental accum to think of that
If your presciption for the fixing of GE is what they actually do, I recommend running for the hills, This prescription is what a finance port folio manager would do almost because he doesn’t know what else to do. Put good managers in place who know their products, market dynamics customer service and investment needs and manage the cyclical businesses that you have opted to be in. A fire sale of good cyclical businesses can’t possible be good for the long suffering stockholders who have suffered poor management, unrealistic promises and large bonuses to incompetent leadership. If the present financial wizards can’t manage the companies they have, they should be replaced quickly before they do more harm.
To Old Wizard -

Just what specifically in the article do you disagree with....and why??

The fact that Flannery has a financial background does not make him incapable of "right sizing" the GE company.
WG Investment Research profile picture
"If the present financial wizards can’t manage the companies they have, they should be replaced quickly before they do more harm." <- Easier said than done, Old Wizard.

I understand your point of view but it appears more and more likely that the only/best option is to streamline operations by cutting the "fat" (some good fat at that). Appreciate the comment.

Thanks and finally some optimism around this stock.
To WG Investment Research (author) -

This is another of your excellent articles on GE, its realities and its possibilities.

I especially liked your closing section -
"If Mr. Flannery is going to be successful as CEO of GE, he will have to navigate this company through the noise and make the right capital allocation decisions. Easier said than done. Warren Buffett may not save GE this time around, but it would be nice to see Berkshire turn out to be one of the companies that enter into one of the hybrid deals that are being floated."

I think Flannery and his team will succeed. And IMO it would be highly desirable if somehow Buffett would be involved with some (any??...one??) of GE's future "hybrid" deals.

Questions -

1) Do you have an opinion of Flannery being "unimpressive" in public interviews and presentations (as many SA commenters have posted)?? Your thoughts??

2) Why do you have GE Transportation as a "dream" transaction to be sold or spun-off??
I consider this segment as a "core" Industrial business that has very favorable margins at 20% even though the business is cyclical. So what?? Everything in life is "cyclical" and that's why it's said "Timing is everything".

3) Is it just coincidental that GE is up over 2.0% today.....or is it (I think likely) that it is driven by your article that was posted earlier this morning at 1:30 AM??
WG Investment Research profile picture
Appreciate the kind words, Mike.

1) I hope that he brings his A game April 20 because he has not been very impressive in his recent interviews. It seems like Mr. Flannery is not great on his feet but I actually like the meat of what he has been saying.

2) The unit seems like a business that could operate as a standalone entity and possibly warrant an attractive valuation due to the high margins. I still want to own a position in it (I will likely buy a small stake if it isn't spun off to current shareholders) but I believe that GE would benefit from streamlining operations. Transportation is a good business but I would rather own it as a separate company.

3) I don't believe that my article came into play. In my opinion, investors may actually believe that the company's path forward is becoming clearer. Only time will tell.

As always, appreciate the detailed comment.

New Low Observer profile picture
"Looking back, General Electric's downfall was actually well-telegraphed and should have been easy to avoid (this is me kicking myself). GE was known as the master of managing its earnings, as shown by the fact that the company beat estimates in 7 out of 8 quarters from late 2015 to mid-2017."

Looking way way back:

"The SEC's complaint, filed in U.S. District Court for the District of Connecticut, alleges that GE met or exceeded final consensus analyst earnings per share (EPS) expectations every quarter from 1995 through filing of its 2004 annual report [36 quarters]. However, on four separate occasions in 2002 and 2003, high-level GE accounting executives or other finance personnel approved accounting that was not in compliance with Generally Accepted Accounting Principles (GAAP). In one instance, the improper accounting allowed GE to avoid missing analysts' final consensus EPS expectations ("SEC Charges General Electric With Accounting Fraud", August 4, 2009. http://bit.ly/2GIub94."

So the question becomes, did GE ever really stop doing what the SEC considered to be fraud which resulted in a $50 million fine?
WG Investment Research profile picture
Great question, New Low Observer.

New Low Observer profile picture
FWIW @WG Investment Research

I don't think GE stopped doing what the SEC considered to be fraud, give it time.
13 Apr. 2018
Their price to sales is less than 1 (3M's price to sales is about 4 and most commodity chemical companies trade at above 1). Power and oil markets are soft. When power and oil markets improve and they get all of this financial BS behind them they'll be making $1.50 a share easy. This is a good long term value play. FYI I bought Etrade and Huntsman at 10 dollars a share they are now trading at 57 and 30 respectively. I spent a few years listening to the same sort of overstated short term bearish analysis with these stocks as we are now hearing about GE.
WG Investment Research profile picture
"This is a good long term value play." -> I agree, danS.

ge healthcare might make sense for the right tech outfit... Say Amazon.com for instance.
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