A Look At How General Electric Is Positioned, Financially

Summary

• A well-known General Electric bear recently lowered his price target for GE from $10 to $6, which caused shares to drop by over 5%.
• I will take a deep dive into General Electric's Q3 2018 10-Q and provide my thoughts on how I view this conglomerate positioned from a financial standpoint.
• I am long General Electric and I plan to stay long the stock. However, GE shares may not be worthy of your investment dollars.
• This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Get started today »

General Electric's (NYSE:GE) stock is at multi-year lows as GE shares are quickly approaching levels not seen since the Financial Crisis.

GE data by YCharts

This storied industrial conglomerate is facing stiff headwinds related to the downturn in the Power industry but GE's management team is also contending with several self-inflicted wounds (i.e., SEC/DOJ investigations, goodwill charges, and the list goes on). As a direct result, the market is extremely bearish about the company's near-term prospects and the poor sentiment is wreaking havoc when it comes to the stock price.

It does not help that the bears are roaring louder than ever, and rightfully so. To this point, JPMorgan's Stephen Tusa released another bearish investor note on GE and lowered his price target from $10 to $6. Mr. Tusa talked down GE's most recent earnings results but his bearish thesis largely revolved around the company's poor financial position and its liquidity.

Mr. Tusa has been on point with his calls on GE over the last two years, so I am not in the position to try to refute his bearish arguments in this article. Instead, I will dig into the numbers from the most recent quarterly report and provide my thoughts on where I view GE currently stands from financial standpoint.

A Look At General Electric's Financial Position And Liquidity

To start, Mr. Tusa has been right on almost all fronts when it comes to General Electric over the last two years, so every investor, including myself, should seriously consider all that he has to say about this company. Again, in this article, I will simply provide my thoughts on GE's financial position, liquidity, and capacity to take on additional leverage. To do this, I will mostly use the Management Discussion & Analysis ("MD&A") section of the Q3 2018 10-Q.

Cash (Is King)

As of September 30, 2018, GE had approximately $27B in cash and cash equivalents with close to 50% being held by the industrial side of the business.

The $27B sounds like a significant number, but it is nowhere close to the balance that the company maintained in the mid-2017 timeframe (after the GE Capital asset sales).

GE Cash and Equivalents (Quarterly) data by YCharts

GE does not have the large cash balance that it had a few years ago, but let's not forget that the company has also greatly reduced its debt balance over the same period of time.

GE Cash and Equivalents (Quarterly) data by YCharts

GE Cash and Equivalents (Quarterly) data by YCharts

Yes, the company could have done more to reduce its debt over the last five years by not buying back shares in the $20/$30 levels or investing in overpriced assets (i.e., Alstom (OTCPK:ALSMY)), but it's not like management completely wasted the funds like some pundits would have you believe.

Debt

Speaking of debt, GE's large liability balance included around $116B of short- and long-term debt as of the most recent period-end.

The company had a net asset position as of Q3 2018 and this is after the approximately $22B goodwill write-down that was recently booked. Moreover, even after backing out the total goodwill balance, GE still has over $250B in assets compared to $260B in liabilities.

Liquidity & Capacity

As of December 31, 2017, the company provided the following debt schedule with the most notable year being 2020 (notice the uptick in debt coming due in next two fiscal years).

Source: 2017 10-K

The figures do not seem too large, but let's also remember that GE has to: service its pension, restructure its business, and possibly increase its insurance reserves. Therefore, I believe that the next few years are going to be a challenging period of time for GE from a financial leverage standpoint.

However, it is important to note that GE has the availability to borrow additional funds, if needed.

And while GE's credit rating has been on the downtrend lately, the company is not yet in the junk territory (although it is close).

Lastly, I still stand by the thought that GE has the capacity to service its debt, especially after considering the fact that the company will be saving almost $4B with the recent dividend cut. To this point, GE's cash flow metrics are not anything to write home about but they are also not as bad as one might think.

The company could ratchet back the debt repayments, if absolutely necessary, and additional assets sales are always an option. My main point, the "bankruptcy is a possibility" calls are a little premature.

Risks

Focusing only on GE's financial position and liquidity:

Downside risks: (1) The company has significant fines related to the DOJ/SEC investigations, (2) Power takes longer than 18-24 months to recovery and burns through cash, (3) management has a fire sale and disposes of assets at rock bottom prices, (4) the company's credit rating hits junk status, and (5) additional insurance reserve charges are booked.

Upside risks: (1) the spins [Transportation, Healthcare, and Baker Hughes] bring in more capital than anticipated, (2) the pension deficit shrinks as a result of the positive tailwinds, and (3) well-known investors put money to work in GE which leads to a positive change in sentiment.

Bottom Line

General Electric is by no means in a healthy financial position, but I do not believe that the company is close to the B word (i.e., bankruptcy). However, with that being said, GE is a multi-year turnaround story, so investors without at least a 3-to-5 year time horizon should honestly look elsewhere - if you are interested in sticking in the industrial space, Honeywell (HON) and United Technologies (UTX) are good options, in my opinion.

This article was written just to get you thinking about how GE is financially positioned for 2019 and beyond. GE is far from being in a healthy financial position, but I agree with management in that the company appears to be "fundamentally strong" with a "sound liquidity position". Therefore, I plan to stay long General Electric, as described in this recent article. That, however, does not mean you should too.

I look forward to hearing your thoughts on General Electric's current financial position and the liquidity concerns.

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, HON, BHGE, UTX. 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.