GE: Let The Fun Begin

Summary

• GE has a new boss.
• This is the best news I have heard in the past year or so.
• As I said last week, those who invested in the low teens could enjoy a great run.
• But opening 1/2 position right now could be worth the risk.
• My FV estimates have been adjusted to reflect latest developments, up to $13.6 a share.

Mark 1 October 2018 on your calendar: The new General Electric (NYSE:GE) is born.

BOSTON - October 1, 2018 - GE announced today that H. Lawrence Culp, Jr. has been named Chairman and Chief Executive Officer of the Company by a unanimous vote of the GE Board of Directors, effective immediately. Additionally, the GE Board has appointed Thomas W. Horton as Lead Director. Mr. Culp and Mr. Horton have been members of the Board since April 2018. Mr. Culp will succeed John Flannery as Chairman and CEO."

What was an obvious corporate decision, to me at least, when John Flannery was appointed as chief executive in mid-2017, has come about one year later. But now it is the time to enjoy the upside rather than pointing to the very simple fact that an outsider should have been appointed one year earlier.

After sticking to a fair value estimate of $12.1-12.5 for about a year, I have finally adjusted my model to account for lower management risk, adding $1.1 to my estimates, which see GE's FV now hovering around $13.6.

If you plan to open half a position today, there would be risk involved, but I wouldn't blame you.

Make no mistake: GE's fundamentals remain the same, of course, even though before the stock markets opened on Monday its shares rocketed up to 15% to ~ $13.1, which is a rather generous valuation given its fundamentals.

Yet this is a completely different ballgame now.

Firstly, a dividend cut and a rights issue could be in the cards, both of which would make a lot of sense to shore up a shaky credit rating. Its long-term bonds now trade below 90, which testifies to the risks involved.

Secondly, there could be more news on the road to its final restructuring, which I am assured is on track but could take a different twist, to give investors other reasons to be cheerful about its prospects.

After all, the healthcare (GEH) spin-off guarantees a floor valuation of about $60bn, including net debt, and then GE Aviation (GEA) could easy command a fair value of over $100bn. Then there is a large Baker Hughes (BHGE) stake to monetize as well as power and renewable energy units which are not exactly on a roll, but whose troubles could be now fully exposed, given latest news.

The question is how Mr. Culp - an outstanding executive who has the backing of the sell-side - will crystallize the value of GEA. As far as managing expectations is concerned, there could be no better leader for the board and shareholders alike.

Apart from these considerations, some of my banking sources have also suggested that Saudi Arabia could come to the rescue for some of its power assets, now that the IPO of Saudi Aramco has been shelved, while also supporting any dilutive cash call if GE goes down that route.

Topping up the balance sheet with $15bn of fresh equity would do no harm, my numbers show.

"Saudi Arabia needs a vehicle and GE is a perfect fit," one of my banking contacts recently argued.

Mr. Culp led Danaher from 2000 to 2014. He is a very smart guy who is "cool and slick as ice, while also friendly, funny, and approachable," one analyst who covered Danaher in those years told me. Another added "if there was a man who can turn this company around, that man is Larry. He knows well the rules of engagement."

This is precisely what GE shareholders need.

Good luck, Larry.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Comments

[Old Wizard]

James, I said it then and I continue to view the Alstom Acquisition as one of the biggest mistakes made by management in my memory. The BHGE merger wasn’t far behind, either. How many financial pundits thought the Alstom Acquisition was a coup by
Immelt and the board rewarded him with a big bonus for pulling it off. Wistfully, I wonder what GE stock would be selling at now, if the 50B+ spent on the two deals and the stock buy backs were not so incompetently used and now available. These three management decisions have to go down in corporate history as among the worse ever. What bothers me even more is that as a stockholder I couldn’t do anything to affect these decisions. We didn’t even vote on it. At my age, it was difficult to start any kind of revolt, but when I hinted at coming to the stockholder meeting with those who agreed with me to the GE stockholder relations executive earlier this year , I did get his attention. Maybe, we should organize a stockholder group willing to become a voting block and demand both more details about GE’s liabilities and a vote on how assets are disposed, etc. I don’t know how you feel, but I have no confidence in Ms. Miller and am disappointed by the first Culp exposition. The one hopeful thing in his words was the split of power and the direct report to the CEO. If he puts this under Ms. Miller, I think we should rebel. Further, separating gas from steam seems to contradict the assertion that the gas steam hybrid market is an opportunity for growth and one of the justification reasons for the acquisition.

[Alessandro Pasetti]

Very well said, OW.

[James Coleman]

Hi OldWiz:

As time goes on, the Alstom deal which I called both overpriced and ill-timed in my article of 12/31/17 look worse, if that's possible.

The $22 B GW impairment charge further eroded GE's financials.

What Culp's changes in POWER are, other than cosmetic, is not clear to me.

Russell Stokes is still head of something, a position he is equally UNQUALIFIED for.

The power market is, and will remain in a "vicious cycle."

And GE CFO (for now) Jamie Miller's rhetoric that "power will be a 2nd 1/2 story" is true..just NOT as she claimed it would be.

And I highly doubt the $1 B reduction in power inventory was accomplished either..nice plan Jamie.

Will we see ANOTHER significant write down this audit KPMG?

[Old Wizard]

Was their a large amount of Good Will on Alstom’s balance sheet that was imported to GE’s balance sheet at the time of the acquisition?

[Alessandro Pasetti]

@Old Wizard: it's all disclosed but you need to find all the relevant bits -> check out the 10-Ks. Or just read this on a preliminary basis:

www.bloomberg.com/...

"Total goodwill associated with the purchase was $17.3 billion at the end of 2016, up from $13.5 billion in the fourth quarter of 2015 and well beyond the purchase price."

More broadly, GE says:

"Through the fourth quarter of 2016, we adjusted the preliminary allocation of purchase price, which has now resulted in goodwill, intangible assets, and unfavorable customer contract liabilities, of $17,304 million, $4,370 million, and $2,720 million, respectively as of the acquisition date.

Goodwill+intangibles=$21.6bn.

"These adjustments, which are necessary to reflect acquired assets and liabilities of the acquired businesses at fair value, reflected revisions in 2016, primarily related to cash flow and other valuation assumptions for customer contracts, increases to legal reserves, and other fair value adjustments related to acquired assets and liabilities. The approximate amounts of significant purchase accounting adjustments recorded since the date of acquisition include a reduction in the book value of assets sold to Ansaldo of $405 million, adjustments to the fair value of derivative contracts of $335 million, decreases in inventory balances of $130 million, increases to legal reserves of $990 million, a reduction in the book value of aged accounts receivable of $175 million and other project related costs such as warranty provisions and liquidating damages of $665 million. In addition, the fair value of all other noncontrolling interests decreased by $55 million."

Of course, there was legacy goodwill on Alstom's balance sheet, later transferred to GE on a combined basis. That said, more simply, GE has added $30bn of goodwill (there are many moving parts here) between 2014 and 2017, and $25bn now is worth zero.

[Old Wizard]

James, you are pointing out that something is radically wrong with How assets are regarded. Do I interpreted some of the statement as it is possible that some “sold”assets receivables may not be collectible? I have suspected that some of Alstom customers are in countries and industries which are and were in marginal or worse financial situations. The statement does not speak to the build up of gas generators. Is there a suspicion that the GCas financing of medical and power equipment sales may not be collected? If so, where are the auditors who permitted the statement to be made without comment.

[Alessandro Pasetti]

OW, legacy assets are affected but GE clearly said that "it expects to take a non-cash goodwill impairment charge related to the GE Power business and "GE Power’s current goodwill balance is approximately $23 billion and the goodwill impairment charge is likely to constitute substantially all of this balance."

PR here: www.genewsroom.com/...

[James Coleman]

@Old Wizard

Now that there is a new sheriff in town, in my view it will be more than interesting to see how GE's adjustment to A/R in 2018 compares to 2017
and prior yr's. ESPECIALLY given the "vicious cycle" in power.

To me, the much bigger issue is how the new new CEO handles the absolutely positively BEAUCOUP slow-moving and obsolete turbine inventory in terms of a writedown.

I've previously stated here and in my GE POWER series that WHOEVER
commissioned those high-priced turbines to be built when all anyone had to do was read Siemen's dialogue about how the market was tightening cost GE s/h BILLIONS.

Given that Russell Stokes is Pres & CEO of GE Power I can only conclude that he oversaw what I consider an egregiously irresponsible decision.

Not exactly his finest hour.

[James Coleman]

OldWiz:

Here's an excerpt from my 3/27/18 SA article my key takeaways from
GE's annual report and 10-K:

"The author strongly believes that the company should initiate an internal audit re the sales unit in order to determine the propriety of the actions they may have taken to obtain sales, including but not limited to the creditworthiness of customers, and the associated payment terms."

[rnn]

The once top leading company has become
and old fossil that is having a lot more trouble than is known.
The throwing dart technique of the company merely shows how bad and dangerous a hold this is.
Its not a sell but a major sell.

[Alessandro Pasetti]

Thanks for your comment, @rnn. Are you one of the $6 a share club?

[Old Wizard]

Can anyone explain how a 13B Alstom acquisition leads to a 23 B impairment write off, what other assets are included. Further, how does an impairment relate to a miss in cash flow or profit?
Next to the churn, management incompetence and a vested interest of the now deposed CEO in the Alstom acquisition deal, the blade problem and the estimated present worth pension shortfall are walks in the park.
We heard over and over that ?Flannery likely kitchen sunked 2017. Now we hear that the new CEO should kitchen sink 2018. If he takes another 12 months to find where the bones are buried in GE capital, power and BHGE we will bury GE forever. If he doesn’t know what to do very quickly, he is the wrong man for the job, He has a good reputation, but the credential which is good at acquisitions isn’t what GE needs, it has to play to the strengths of its large fielded base, concentrate on efficient, responsive operations and responsive customer service that increases its more lucrative maintenance contracts in power and oil field services,

[Alessandro Pasetti]

We'll found out more this month, @Old Wizard, but the write-down should include both the goodwill and the diminished valued of productive power assets, and could be enough for 2018, but there could be more to come next year. As we said in the past, we knew that more bad news had to be expected this year, right?

Give the new chief some time.

[James Coleman]

@Old Wizard

I replied to a similar ? of yours to me at another thread.

What's MOST troubling to me is this "gem" from GE's most recent SEC 10-Q:

As a result of this assessment, we performed an interim step-one impairment test at our Power Generation and Grid Solutions reporting units within our Power segment in the second quarter of 2018. The results of the analysis indicated that fair value was in excess of carrying value by approximately 10% for our Power Generation reporting unit and 9% at our Grid Solutions reporting unit. The goodwill associated with our Power Generation and Grid Solutions reporting units was $19,041 million and $4,586 million , respectively, representing approximately 23% and 6% of our total goodwill at June 30, 2018. Also, in the second quarter of 2018, as a result of classifying a significant portion of Healthcare Equipment Finance’s financing receivables as assets held for sale, we performed an interim step-one impairment test at our Industrial Finance reporting unit within our Capital segment. The results of the analysis indicated that fair value was in excess of carrying value by approximately 12% . While the goodwill of this reporting unit is not currently impaired, there could be an impairment in the future as a consequence of the disposition of these financing receivables classified as assets held for sale. The goodwill associated with our Industrial Finance reporting unit was $ 111 million at June 30, 2018. As of June 30, 2018, we believe goodwill is recoverable for all of our reporting units.

Hmmm.. so at 6/30/18 everything was fine and dandy, right?

Then in 2 month's time the SHTF and it goes from ZERO to $23 Billion?

got it.

[Alessandro Pasetti]

GE just did not hedge SHTF risk, James, and that's a common mistake when corporate governance risk is not not properly managed...

[B. Benjamin]

The motor is dead. Changing the driver won't help.

[Alessandro Pasetti]

I disagree, the motor is not broken and if you are focused only on the driver, very possibly it is because you have not paid attention to the navigator, @zurn22. Thanks for your comment.

[wisolman]

I think motor broken. Worked for GE for years. No innovation at GE - innovate or die. Big competition coming from other nations - GE not well liked outside of US. Hard company to deal with. It’s beaten down so may get technical bounce but long term it’s a dig imo

[SouthDakotaSaver]

Fun comment. The CEO is the navigator and GEs pilots were not shaped to think independently while the earlier Board just gave a stamp of approval. Many "painful" and overdue cuts will be forthcoming dead wood has to go not an easy job but must be done.

[Alek4]

www.naturalgasworld.com/...

The  order value is approximately $350 million

[Alessandro Pasetti]

... and more coming up soon, @Alek4?

[Alek4]

let's hope!
but tusa has just confirmed 10$ and sell rating..what do you think about it?!

[Alessandro Pasetti]

Could an analyst leading the Street come out with an upgrade after a board member is appointed as CEO, @Alek4?
NO WAY.
He'd lose credibility.
There is intangible value here, IMO, but you'll never find a serious sell-side analyst telling you that that is the reason you should buy a stock. Be patient, He'll find a way to be more bullish, not now though... that said, we are two buck above its PT, let's see how it goes.
(Edited)

[buddhaboogie]

Invest on the fundamentals. I’m glad for this change st the top. It’s welcome. It’s said to be a good call across the board, and we do want to believe again. But the fundamentals are not suddenly good. The potential has not turned around. Like SEC chairman Pitt once said: “When the going gets tough, the tough get out of the way and let someone else do the dying.”

[Alessandro Pasetti]

Thanks for your comment, buddhaboogie.

[bbqduckie]

So fight for the company heh? Dumb BOD went for Flannery aka 2 Jet Jeffy’s boy 2 years ago when Culp was presumably available for hire... 50% stock loss (market value close to $100B if not more) later they finally hired the man... Fall man or not, Joke Flannery lost more money than Lehman in 09 and should earn him (along with our favorite CEO 2 Jet) a spot in the Hall of Shame next to the Enron boys.

[Alessandro Pasetti]

Man, if he really said that (I did not manage to get hold of the original source, did you?), well, you know. It's a rookie mistake, it should have taken a month for the board to show him the door, anyway. But wait, now it's some of the board members' turn...

[Anasazi101]

About another 50% would be about right.. IMO.
long for now..
1oct-2:36p

[James Coleman]

I nominate John Brennan as point man to lead the exodus; not aware of the logistics but wecan work out the details as we go.
@Alessandro Pasetti

[User 48933151]

Welcome aboard Mr. Culp - the 1st item of business it to show you our 'other' set of books.

[Alessandro Pasetti]

Absolutely right, @Kielanders.

[James Coleman]

@Kielanders

Same GE, different CEO

[Alessandro Pasetti]

Very true, based on what has been disclosed thus far.

[Dr. LouX]

Decisions, decisions, decisions

[Alessandro Pasetti]

Not many to be made, just the right ones, @Dr. LouX!

[Dr. LouX]

@Alessandro Pasetti , now why didn't I think of that? Ha! LOL

[Alessandro Pasetti]

Ah Ah!

[Buyandhold 2012]

"Mr. Culp led Danaher from 2000-2014."

Enough said. Glory be! With someone like Mr. Culp on board, GE may have a chance to rise from the dead like Lazarus.

Let the fun begin at GE?

Actually it was fun to be a GE shareholder from 1982 to 2000 during the big bull market.

But from 2000 to 2018, being a GE shareholder has been about as much fun for me as being stranded on a desert island with the ladies on "The View."

Let's all pray for GE. GE needs all of the help that it can get. A little divine intervention wouldn't hurt.

[Anasazi101]

Gave you a thumb or a like.. Although I watch the View.. most days.
But have grown weary of $GE, just hoping for better now..
01Oct2:32p

[Alessandro Pasetti]

Thanks, @Buyandhold 2012, as usual. I thought you opened your position in 1896 when the DJIA was created...

[Buyandhold 2012]

Alessandro Pasetti,

"I thought you opened your position in 1896 when the DJIA was created....."

No, I opened my position in 1984.

I wish that I had invested in Philip Morris in 1925.

Did you know that a $1,000 investment in Philip Morris in 1925 would be worth about 250 million dollars today?

Unfortunately, I wasn't alive to buy Philip Morris in 1925.

But my stock market mentor was. Only problem was she didn't have $1,000 bucks in 1925. She was only 4-years-old.

[marriottmare]

Stay long

[Alessandro Pasetti]

Why, marriottmare, in your view, that would be a wise allocation of capital?

[Suspirium Puellarum]

All I want now is a VERY SIMPLE answer:

Will GE's board attempt to claw back some/all of "2 jet" Jeff Immelt's ridiculously lucrative retirement package?

[Alessandro Pasetti]

At a time the SEC fines TSLA and Elon a combined $40m? No. Just my view. Thanks for asking, SP.

[SouthDakotaSaver]

Your narrative rings true to me. The fundamentals are the same, but the subjective side of the equation is just as important and today's news changes everything. I find most analysts have difficulty incorporating the mushy stuff with the numbers they mainly care about charts, graphs, earnings and revenue but there was a crisis of confidence that will now pass. Flannery could not inspire we should appreciate he was a decent guy that stepped forward during a troubled time, but he couldn't execute and he couldn't lead. Bottom line companies are about people. As far as being objective we can't be objective if we are stakeholders when I started following GE I had no idea the games shorts play, in hedge funds and so on all the dirty tricks to impact price there's a war that goes on out there that Culp knows how to play. Best news for months indeed.

[Alessandro Pasetti]

@SouthDakotaSaver, thank you. Of course, analysts are committed to a very different corporate story, but then those covering GE have seldom been right in the past few years (ex JPM/DB)...

[johnlivingsto4]

Flannery was not the CEO who put GE in a nosedive. He was trying to fix a torpedoed battleship. Torpedoed by Jeff Immelt and board for the last 10 years. Flannery cut the dividend by half when he took over ceo

[Alessandro Pasetti]

You are right, @johnlivingsto4, but let me repeat what I said on another wall (Mike Boyd's) earlier today.

Surely he is no scapegoat, but rather another GE exec who made up the (FcF/EPS) numbers to buy some time. Pushed, and rightly so. He did exactly the opposite of what an executive in a good state of mind would have done in just about a year. GE will (...) do well if Culp manages to convince a couple of other big guns to join to board – it could be an incredibly rewarding investing experience. It's not easy, but with the pain comes the glory, at times. One to watch.

[James Coleman]

This GE s/h happily 2nd's your motion for "big guns to join the board."!!!

[Alessandro Pasetti]

Two big guns, @James Coleman!

[Oil Can]

Why in heaven's name would you open a position today (up 10+%)?

In a month, when the latest reality sinks in again - missed guidance, $23B charge, almost certain dividend cut, the stock will be well below $10.

A buying opportunity may be coming up, but it's not today.

[Alessandro Pasetti]

It is a boring story. As I told Billyb1980 (see higher up), I do not invest in the companies I cover – never – as I abide by WSJ rules. Thanks, Oil Can.

[Joe_G]

Buy or sell opinions should always hinge on the facts. And when the facts change, so should the opinion.

I'd say the replacement of a feckless CEO with a more capable leader certainly qualifies as a material fact that has changed. That doesn't necessarily mean GE is now an automatic buy, but it does mean they have my attention in a way that they didn't yesterday.

[Littlebeef2]

Agree, down to +9.66% now. 10:52 ct

[markmendlovitz]

My problem with selling Power is that there are fundamental synergies in Aviation and Power. Then there are synergies in
Power and Renewables. The three are interlocked.

[Alessandro Pasetti]

What synergy in particular you envisage between Aviation and Power, @markmendlovitz?

[markmendlovitz]

Turbines and jet engines are very similar. Science and material engineering is the same.

[Alessandro Pasetti]

No, I don't think so, @markmendlovitz.

I have found little evidence that significant synergies can be exploited by combining the two (GEA+GEP, ex GER) units, as I argued here seekingalpha.com/... (check out the comment section):

"In a recent conversation, one SA reader warned me that GE Aviation (GEA) and GE Power (GEP) are exactly the same machine. Both "are gas turbines", he said, so it is the "exact same basic concept". In his own words, one creates thrust to lift people, the other creates thrust to drive electrical generators."

And so on.

Please prove me wrong.

[User 43034176]

Big fan of $DHR H. Lawrence Culp and respect this move

Long $GE over here

Still think more pain is on the horizon, still full position over here, still going to buy to overweight in the $6-$9 range and feel a whole lot better who is at the helm here.

[Alessandro Pasetti]

Same here, @Blury8. Let's see how it goes. Thanks for your comment(s)!

[Orange Ranger]

One year late indeed. I expect a long-term turnaround but short-term a reversal in the price development. Today's $23bn goodwill write-off was utterly embarrassing both in amount and timing (do you not see this coming ...). To lob this in under a new CEO announcement, not thanking Flannery for picking up the hot potato the last year, is not professional nor does it show good taste. Board should take accountability here as well. Sold my position today and will follow the shorter term decline and nibble a bit at the stock on the way down. Pensions, rating, free cash flow, debt reduction, m&a activity, (maybe even reversal of some previous announcement; that would be confusion management !) insurance etc. Today's move was irrational. Wish new CEO good luck !

[Alessandro Pasetti]

Embarrassing, yet enough @Orange Ranger? Maybe, maybe not, right? It should be ok for 2018 (u recall all those who talked of a kitchen-sink quarter last year? Ah). Thanks for your input, many investors looked at the GE trade today the same way you did, I gather.