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GE - >>> There’s still some good at GE — but much more bad and ugly


By Jeff Reeves

Nov 14, 2017



https://www.marketwatch.com/story/theres-still-some-good-at-ge-but-much-more-bad-and-ugly-2017-11-13?siteid=bigcharts&dist=bigcharts



Stagnant thinking, a Dow death watch and more

This is not the time to take a chance on General Electric.

Shares in the industrial giant GE, -5.52% have fallen to fresh 52-week lows after the industrial giant slashed its dividend in half, the second reduction in payouts in less than a decade. The longer-term picture also is ugly: The stock is down almost 40% so far this year, compared with 15% gains for the S&P 500 SPX, -0.29% .

The dividend cut is part of a series of big items revealed in the company’s “investor day” event on Monday. And while a few of the items were encouraging, plenty of other items are working against the stock.

Personally, I don’t see General Electric as a wise bet. Momentum was against the stock before the dividend cut, and the burden is on GE to disprove the existing narrative of mismanagement and stagnant growth prospects.

Here’s what’s good, bad and ugly about GE right now.

The good

A fresh start under Flannery: Sure, CEO John Flannery is admittedly a GE insider and not a transformative outside hire, but a fresh face at the top is an important first step in changing the culture and trajectory. Given GE’s complicated corporate structure, it may not be possible to find a better outside hire — and at least the company did expedite a changing of the guard with ex-CEO Jeff Immelt stepping down early. Flannery came off as pragmatic and level-headed at investor day, which is encouraging.

Deeper cuts: The big dividend cut is only the start of reduced spending at GE. There is a planned reduction in board seats, which will save salary as well as simplify management as top execs are compensated more in equity stakes than in cash to align incentives with shareholders. And previous rumors of “aggressive” layoffs show that positions are being cut all around as the company streamlines. All in, GE expects to cut costs by over $3 billion going forward, with $2 billion in cost reductions in the next year.

Expected exits: While there may not be a major corporate shake-up, Flannery admitted in his investor day commentary that “complexity has hurt us.” General Electric is tactically exiting smaller parts of its non-core businesses. There are reports that the company will unload its majority stake in Baker Hughes BHGE, -5.45% after a recent merger between the firm and GE’s oil and gas business as one example. That would both help streamline the business and raise cash.

Funding growth: Cutting alone won’t turn GE around. So it was encouraging to see a vow in the investor day presentation to spend more on key areas. Notably, there were hints at investments in the growing Life Science division as well as opportunistic spend in its Aviation unit to capitalize on military demand under the expansionary defense policies in Washington. Both are logical in the scope of GE and in the broader business environment.

More transparency: When I warned investors off GE in an October column, I mentioned GE’s hard-to-understand operations as a big red flag. This is a common complaint from investors, and GE on Monday pledged to make its balance sheet simpler to understand. This gesture was undoubtedly in part born out of a “comment letter” from the Securities and Exchange Commission in July warning that its filings were potentially misleading, but the change is a welcome one for GE investors nevertheless.

The bad

Dividend cut: The big news is that GE cut its dividend in half, from 24 cents quarterly to 12 cents. Worse, this is the second mammoth dividend cut in less than eight years, after it slashed payouts from 31 cents to 10 cents in 2009 after the financial crisis.

Third-quarter earnings miss:Say what you want about the top-line troubles, but GE had previously been remarkably consistent about meeting expectations on earnings. That didn’t happen in its third-quarter report, however — the first miss in 2½ years.

Forward guidance: Worse, that earnings trouble doesn’t seem like an isolated incident. At its investor day meeting, the company announced significantly lower earnings and free cash flow numbers. That is worrisome in the near term.

No big breakup: GE has pledged a bigger focus on its three core lines of aviation, power and health care. But thus far, there is no radical restructuring or breakup plans involved — just a “granular diagnostic of each GE business” as it was so tediously framed in the investor day presentation. Investors have been turned off by the lack of urgency and slow progress to transform this conglomerate, and it’s worth asking when General Electric will ever truly “right-size” its business if it won’t do so after the pain of 2017.

Pessimistic analysts: A widely followed Cowen analyst recently calculated a valuation for GE stock, giving it a total price tag of $11 to $15 per share if the company was parceled off and sold for parts. That’s an ugly 25% to 45% downside from here, and doesn’t show a lot of value to be had from selling off lesser parts of the business. Elsewhere, J.P. Morgan reiterated an “underweight” rating in early November after earnings, with a target of just $17. Even after the pain thus far in 2017, some investors think there is more downside to come.

The ugly

Downside momentum: Like the declines we saw during the 2008 market crash, the waterfall declines in GE stock show no sign of abating. Shares are down nearly 40% from their January high in an almost steady downward spiral to prices not seen since 2012. Longer term, shares have declined roughly 50% since November 2001. It’s hard to believe in a stock with a history like this.

Stagnant thinking: Despite a pretty ugly track record of the last decade or so, General Electric is an insular company that doesn’t seem to care about looking outside itself for solutions. A great Bloomberg piece this summer highlighted how top executives under Immelt moved on to run other companies, among them Boeing, Home Depot and Honeywell — and starved GE of brain power. Now, when things look grim at GE, we once again have an insider taking the helm. A lack of outside perspective is fine if you’re succeeding, but that hardly seems wise at a struggling firm like GE.

Pension problems: Pension obligations loom large over GE, and the $31 billion shortfall remains a big concern. The company hinted at these liabilities in its “capital allocation principles” at investor day, and it’s clear that some of the savings from cost-cutting will be going into this black hole and not into actually making GE a better company.

Dow death watch: For a long time, GE has been seen as one of the weakest components in the Dow Jones Industrial Average despite being the only company that has been included since the blue-chip index was founded. Just as once dominant Alcoa and AT&T got bumped from the index for the likes of Apple and Visa, GE could easily be bumped for a corporation that is more representative of the 21st century economy. That loss of a spot in a benchmark index in the age of index fund dominance could be a very bad thing for an already struggling GE.

Wasted buybacks: GE’s investor day presentation continued to tout “opportunistic use of buybacks.” However, the history of repurchases at the industrial giant hardly seem opportunistic given the roughly $45 billion spent on buybacks in 2015 and 2016 rather than allocated toward long-term business solutions. That hardly seems a wise use of capital, and hints any extra cash may be misspent again in 2018.

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