The stock price of General Electric (GE) continues to crater as if the company is heading towards obsolescence or serious financial troubles. Nothing could be further from the truth. The company has more than ample assets and liquidity to cover its debts and other obligations such as pensions and insurance liabilities. The share price has fallen so low that GE Aviation is worth a lot more than General Electric is trading for. GE Healthcare is also worth more than General Electric is trading for.
The reason it has been so easy to create a climate of fear and panic around the stock price of General Electric is because of the bumbling missteps of management. The key to staying in the good graces of Wall Street analysts is to under-promise and over-deliver. GE management has done the opposite. They have continued to minimize the challenges some parts of the company face. With each new revelation, they allowed the perception to take hold that GE has many hidden problems and management is not up to the task of fixing those problems. The bearish case is eventually those hidden problems may sink the company.
That perception has become the reality for shareholders. I recognized this problem last year and wrote this Seeking Alpha article on June 12, 2017: General Electric Should Use Immelts Departure To Break Up Company. On the date of that publication, the share price of General Electric closed at $28.94. My argument was that GE was too big and had too many parts that had no synergies. Investors would be better off with a big break-up. The same argument holds true today. The big difference is now the perception surrounding General Electric has to be fixed before it can maximize shareholder value by breaking up the company. The negative perception can be changed.
Here are Three Things most investors do not know about General Electric:
First: According to the latest 10-Q, General Electric has a net $40.8 billion revolving credit line with lenders. As of September 30, 2018, the company had ZERO borrowings under these credit facilities. This is hardly the sign of a company experiencing financial stress.
Second: General Electric has reduced its total borrowings by almost $20 billion in the last year. Total borrowings on September 30, 2017, were $134.6 billion. On September 30, 2018, total borrowings fell to $115 billion. That includes all of the debt owed by General Electric and by GE Capital. The company has also reduced its other liabilities. How can it be that a company that is imploding is reducing its debts?
Third: The company has announced $7.8 billion worth of assets sales that should close soon:
In May 2018, we announced an agreement to merge our Transportation segment with Wabtec Corporation, a U.S. rail equipment manufacturer. Under the agreement, which has been approved by the Boards of Directors of Wabtec and GE, GE will receive $2.9 billion in cash at closing, and GE and its shareholders will receive a 50.1% ownership interest in the combined company, with GE holding 9.9% and GE shareholders holding the remaining 40.2%. Wabtec shareholders will retain 49.9% of the combined company. The deal is expected to close in early 2019, subject to customary closing conditions and regulatory approval."
In June 2018, we announced an agreement to sell our Distributed Power business within our Power segment to Advent International, a global private equity investor, for $3.3 billion. The deal is expected to close by the fourth quarter of 2018, subject to customary closing conditions and regulatory approvals."
In September 2018, we announced an agreement to sell our Middle River Aircraft Systems business within our Aviation segment to Singapore Technologies Engineering, a global technology, defense and engineering group, for $0.6 billion. The deal is expected to close early 2019, subject to customary closing conditions and regulatory approvals."
In October 2018, we announced an agreement to sell a portfolio of approximately $1.0 billion, including certain assumed obligations, of predominately equity investments in energy assets to Apollo Global Management, LLC. This EFS portfolio within our Capital segment comprises investments in renewable energy, contracted natural gas-fired generation and midstream energy infrastructure assets, primarily in the U.S. The deal is expected to close in the fourth quarter of 2018, subject to customary closing conditions and regulatory approvals."
Most investors listening to the negative voices on General Electric are totally unaware of the progress management is making in streamlining the company. Of course, when management cuts the dividend to $.01 per share, people tend to sell and ask questions later. This is why General Electric should break-up. No one can simplify its story for Wall Street to fully digest it.
For example, GE Aviation alone is worth a lot more than the market cap of all of General Electric. A good comparison for GE Aviation is Boeing (BA). The market is trading Boeing at a forward PE ratio of 21. Here is a look at GE Aviation's third quarter performance:
GE Aviation had $1.7 billion in the third quarter profits. On an annual basis, GE Aviation could have $6.8 billion in profits. Multiply that by a forward PE ratio of 21 and GE Aviation would trade at $143 billion. While investors can debate whether GE Aviation should trade for more or less than $143 billion, there is no doubt it is worth more than the market value for all of General Electric. The current market cap for all of General Electric is only $62 billion.
The graphic above also shows the $.9 billion of quarterly profits for GE Healthcare. On an annual basis, the profits for GE Healthcare would be $3.6 billion. Medtronic (MDT) is a good comp for GE Healthcare. Medtronic is trading for a forward PE ratio of 18. GE Healthcare could be worth $65 billion on the market if it traded for the same valuation that Medtronic is currently trading for.
One can see that the bearish case for General Electric seems to be way overdone. Aviation and Healthcare are not businesses that are heading for obsolescence. The company is methodically improving its balance sheet. And the company expects to raise $7.8 billion in cash coming from near-term asset sales. When I look at General Electric, I see the opportunities for the company are being minimized by Wall Street and the problems are being maximized by Wall Street. It looks like it is a very good time to buy shares in General Electric. Investors should do their own due diligence before making any investment.