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General Electric: What the Bulls Are Missing


Like a ton of financial specialists, I had high trusts in General Electric (NYSE: GE) when I purchased shares barely a year back. Be that as it may, at that point the other shoe dropped (or, rather, the other dozen or so shoes continued dropping and dropping and dropping), and it rapidly turned out to be certain that the image at GE wasn’t anyplace close as blushing as the organization had been persuading.

Fast-forward through an (excruciating, for financial specialists) year of profit cuts, insurance charges, writedowns, lowered guidance, asset sales, and a CEO exit, and here we are. Despite everything I think things look quite bleak for GE, however a lot of individuals believe I’m wrong.

Truth be told, a few investigators trust that GE – now exchanging at about $7.50/share – has at long last hit an appealing valuation. This is what they’re absent.

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A row of light bulbs with just one lit

The sum of its parts

GE is as of now comprised of one incredibly solid division (GE Aviation, which makes flying machine motors), one in number division (GE Healthcare), and a couple of duds, including its low-edge shopper lighting business, its little sustainable power source unit, and its lead GE Power, whose declining deals have been the reason for a significant part of the combination’s cerebral pains. GE likewise possesses a 62.5% stake in Baker Hughes, a GE Company (NYSE: BHGE).

GE bulls propose that from a valuation point of view, if GE somehow happened to be separated totally and sold off piecemeal, investors would more than recover their cash, given the present offer cost – which means a market top of simply over $65 billion. In the event that that is the situation, GE could be considered underestimated, or even a noteworthy deal. How about we complete a fast valuation of GE’s real resources so you can see the bull case.

Adding it all up

GE’s stake in Baker Hughes is probably the easiest asset to ballpark. With Baker trading at about $23 per share, GE’s stake is worth about $15.8 billion.

GE and its shareholders are also set to receive 50.1% of the shares of the new Westinghouse Air Brake Technologies(Wabtec) as part of its merger with GE Transportation, which should close in early 2019. GE shareholders will also receive $2.9 billion in cash from the transaction. It’s tough to know exactly what that stake will be worth in the end. But, conservatively, if we just look at Wabtec’s current market cap of about $8.4 billion, half of that plus $2.9 billion in cash equals $7.1 billion.

Moving on to GE Healthcare, perhaps the best thing to do is to look at the current valuation of its smaller rival, Siemens Healthineers, which currently has a market cap of about $42 billion. Healthineers was recently spun off from Siemens, so an apples-to-apples comparison is tricky, but it seems to have slightly less annual revenue than GE Healthcare — about $16.1 billion compared to the $19.1 billion that GE Healthcare reported in 2017 — and far less net income ($1.6 billion compared to the $3.4 billion that GE Healthcare reported in 2017). Let’s give the bulls the benefit of the doubt and assign a value of $84 billion (double Healthineers’ value) to the twice-as-profitable GE Healthcare.

The big prize, of course, is GE Aviation, which is even stronger than GE Healthcare, and ought to be worth more: some estimates put its value at $100 billion. Let’s use that figure, and assume that the low-margin consumer lighting business, the collapsing GE Power business, the middling renewable energy business, and the company’s troubled financial arm, GE Capital, aren’t going to be worth much when all’s said and done.

Add it all up and you get $206.9 billion: about three times higher than GE’s current market cap of $65 billion. But here’s the thing: this simple analysis ignores a major red flag…or, should I say, a red-ink flag.

Drowning in debt

It’s not enough to just look at GE’s assets when valuing the company. You also have to look at the company’s liabilities, and they are substantial. Here are some of the liabilities listed on GE’s most recent balance sheet from Q3 2018:

GE Balance Sheet Line Item As of 9/30/2018 (unaudited)
Short-term borrowings $15.2 billion
Long-term borrowings $97.1 billion
Investment contracts, insurance liabilities, and insurance annuity benefits $35.6 billion
Non-current compensation and benefits $34.3 billion
Other GE current liabilities $17.9 billion
All other liabilities $19.9 billion
Total (these items only) $220 billion

Data source: General Electric Q3 2018 10-Q, p. 68.

Yikes. Between short-term debt, long-term debt, investment and insurance liabilities, and underfunded pension obligations (the “non-current compensation and benefits” line), GE has a mountain of red ink on its balance sheet. And then there’s the $37.8 billion in “other” liabilities that we have no idea what it consists of. These liabilities alone are higher than that $206.9 billion we estimated as GE’s value.

The bulls would point out that GE also has $26.9 billion in cash on its balance sheet, and that as interest rates go up, unfunded pension obligations should go down. But even if the company could cut its unfunded pension obligations line in half, and if we factor its cash-on-hand into our valuation, we still get a value of $233.8 billion against $202.8 billion in debt, yielding a net value of $31 billion, less than half of GE’s current $65 billion market cap.

That’s hardly a bull case.

No bull

So, from a valuation standpoint, GE — even after its 75% stock price slide over the past three years — doesn’t look like much of a bargain. In fact, things may be even worse than I outlined above: just because these seem to be reasonable valuations doesn’t necessarily mean that’s what GE would fetch for those assets in a sale. In fact, if GE is looking to sell these assets quickly to raise cash, it may have to accept whatever discounted price it can get.

Plus, GE has a history of unearthing surprise liabilities — like the unforeseen $6.2 billion insurance charge it incurred in late 2017 — which means that even more of its value may already be spoken for. Lastly, once assets are sold, they don’t generate cash flow for the company, which means it may be even harder for the company to rid itself of debt.

The bottom line is that investors looking for bargains would be better off looking elsewhere.


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