Author Topic: GE - General Electric  (Read 38885 times)

Spekulatius

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Re: GE - General Electric
« Reply #140 on: February 02, 2018, 05:35:41 PM »
I agree with you 100%. 

Just ballparking, roughly $20B EBITDA.  Something like $105B net debt (including pension obligations) + $135B market cap = $240B EV.  So EV / EBITDA of 12x?  I think I am light on the debt levels too.  I just don't see it being cheap at a high level, doesn't seem worth digging into.

Well, much of the debt are liabilities from GE financial. The debt levels arenít really that high. Itís should be valued on the basis of Its SOP and ai think that value is north of $20/share.
To be a realist, one has to believe in miracles.


DTEJD1997

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Re: GE - General Electric
« Reply #141 on: February 02, 2018, 11:26:11 PM »
I agree with you 100%. 

Just ballparking, roughly $20B EBITDA.  Something like $105B net debt (including pension obligations) + $135B market cap = $240B EV.  So EV / EBITDA of 12x?  I think I am light on the debt levels too.  I just don't see it being cheap at a high level, doesn't seem worth digging into.

Well, much of the debt are liabilities from GE financial. The debt levels arenít really that high. Itís should be valued on the basis of Its SOP and ai think that value is north of $20/share.

OK:

Assume that most of the debt is related/in GE financial...and that GE Financial has good assets to offset the debts.  So much so that it cancels each other out.  Thus, GE is not as heavily levered as I initially thought it to be...

Book value is still a bit above $7/share ($7.41).  What type of ROE will GE be able to make on that book?  15%?  I would argue that might be unrealistically optimistic at this point in time...but let us use that for discussion sake.  That would get you earnings of about $1.05/share.

Looking at analysts estimates for next year, they are coming in at a range of $.85 to $1.15/share.  A P/E of something like 18.4 to 13.6.  In all but the most optimistic analysts opinion, the stock looks fully valued on next years earnings.  That is at/near a 52 week low.

In recent memory, GE has tended to surprise on the DOWNSIDE.  Their corporate culture is unquestionably WORSE now than what it was in the past. So I would argue that it is more likely than not to surprise to the downside or to have operational problems.

Then you've got the pension problems.  Recently, with a broadly rising market, this may be somewhat less than what it was even a year ago.

Of course, I am a hard core value investor, and think that paying a P/E of double digits is "crazy".  My expectations for valuation are frequently out of whack with what the market thinks is good/acceptable.

Spekulatius

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Re: GE - General Electric
« Reply #142 on: February 03, 2018, 04:36:47 AM »
I agree with you 100%. 

Just ballparking, roughly $20B EBITDA.  Something like $105B net debt (including pension obligations) + $135B market cap = $240B EV.  So EV / EBITDA of 12x?  I think I am light on the debt levels too.  I just don't see it being cheap at a high level, doesn't seem worth digging into.

Well, much of the debt are liabilities from GE financial. The debt levels arenít really that high. Itís should be valued on the basis of Its SOP and ai think that value is north of $20/share.

OK:

Assume that most of the debt is related/in GE financial...and that GE Financial has good assets to offset the debts.  So much so that it cancels each other out.  Thus, GE is not as heavily levered as I initially thought it to be...

Book value is still a bit above $7/share ($7.41).  What type of ROE will GE be able to make on that book?  15%?  I would argue that might be unrealistically optimistic at this point in time...but let us use that for discussion sake.  That would get you earnings of about $1.05/share.

Looking at analysts estimates for next year, they are coming in at a range of $.85 to $1.15/share.  A P/E of something like 18.4 to 13.6.  In all but the most optimistic analysts opinion, the stock looks fully valued on next years earnings.  That is at/near a 52 week low.

In recent memory, GE has tended to surprise on the DOWNSIDE.  Their corporate culture is unquestionably WORSE now than what it was in the past. So I would argue that it is more likely than not to surprise to the downside or to have operational problems.

Then you've got the pension problems.  Recently, with a broadly rising market, this may be somewhat less than what it was even a year ago.

Of course, I am a hard core value investor, and think that paying a P/E of double digits is "crazy".  My expectations for valuation are frequently out of whack with what the market thinks is good/acceptable.

I donít think the ROE on a book value is a realistic way to estimate GEís earnings power. I think a SOP analysis is better be sure GE is currently underesrming in several segments ( Energy, Finance, Trubines .)

GE finance has $35 in equity and $150B in assets, so that is where most of the debt is coming from. I am not sure what it is worth after the rece;toy announced shortfall in insurance reserves, probably less than book value.

GE energy is currently roughly breakevem, but the valuation of GEís  BGHE stake implies. $20B valuation. BHGE has a good balance sheet, FWIW.

Then there is the aircraft turbine crown yewel, the infrastructure business and GE health care, which are good business, deserving a decent multiple, minus the pension liabilities (which should be smaller now than $30B, because the interest rates rise) and the bloated corporate overhead.

Itís not a Valiant, where the whole business is broken and there are boatloads of debt. GE has debt, but it is manageable. I think they need to restructure the company, cut overhead cost, deal with the pension and insurance reserve shortfall and further reduce GE capital to the parts that are attached to existing business, sell GE finance or Spin it off ( they need the cash so selling makes more sense) and then just run the arircraft, infrastructure and healthcare business efficiently.
To be a realist, one has to believe in miracles.

tiddman

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Re: GE - General Electric
« Reply #143 on: February 03, 2018, 07:37:56 AM »
Holy smokes, I was surprised to see this thread here, which I started more than 7 years ago!

It was not a very good thesis, I never bought GE and hope I didn't convince anyone to do so.

In the Jack Welch era, many were skeptical of the underlying performance of the businesses, GE's accounting, and their reliance on GE Capital as a source of earnings.  The company generated a reputation as black belts in management but it looks more like an incompetent boys network.

Today I am not sure I see much that should interest shareholders.  If they do break up the business I think we'll get better insights into the performance of individual businesses, and we might not be too impressed by what we see.  Those that are interested in investing should ask themselves why exactly.  If it is due to their reputation, consider that the reputation is not justified.

mwtorock

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Re: GE - General Electric
« Reply #144 on: February 03, 2018, 08:40:40 PM »
it is currently in the too hard pile for me ;)

vinod1

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Re: GE - General Electric
« Reply #145 on: February 04, 2018, 06:54:01 AM »
Took a very quick look to see if a deeper dive makes sense

GE Industrial segment has revenues of about $114 billion. Assuming an EBIT margin of 15% (really the key assumption), operating earnings would be $17 billion. GE has corporate overhead of about $4 billion consisting of

a.   $2 billion in pension costs to fund the $30 billion in pension under funding
b.   $1.5 billion in corporate expenses
c.   $0.5 billion in normalized restructuring expenses

GE Industrial segment has debt of $40 billion ($135 billion at GE less $95 billion at FS). At 5% rate, interest expense is $2 billion. Assuming a 20% tax rate, net income is about $9 billion or about $1 EPS based on 8.7 billion shares outstanding.

Slapping a PE multiple of 15, a reasonably case could be made for a minimum IV is about $15 per share. If operating margins increase by about 3%, earnings would increase by about $2.8 billion and add $5 to IV to about $20 per share.

Financial services unit  has shareholders equity of about $13 billion. It is expected that FS unit would start making money again from 2020 at about $500 million per year. So this unit is worth about $5 - $10 billion. So not a major contributor to IV.

If I had a gun to my head and my only choice is putting 5% of portfolio in either S&P 500 or GE, I would choose GE. But otherwise does not seem too attractive without a really good management and on which I do not have much insight.

Are there any big items that I am missing from the valuation? I ignored BHGE minority interests for example, but that does not add to the upside. I am wondering where the upside is that attracted many investors when it is in the $20's.

Vinod
« Last Edit: February 04, 2018, 07:27:01 AM by vinod1 »
The fundamental algorithm of life: repeat what works. ĖCharlie Munger

vinod1

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Re: GE - General Electric
« Reply #146 on: February 04, 2018, 07:06:38 AM »
Going through the filings I would say that the only black-belt GE seems to have is in accounting - looking at how many non-GAAP measures ("Industrial operating + Verticals EPS" :) ) they define. Does not really answer many questions on individual business units - how much capital is employed, how much good will, what is ROC, etc.

Vinod
The fundamental algorithm of life: repeat what works. ĖCharlie Munger

txvalue

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Re: GE - General Electric
« Reply #147 on: February 05, 2018, 07:35:08 AM »
Going through the filings I would say that the only black-belt GE seems to have is in accounting - looking at how many non-GAAP measures ("Industrial operating + Verticals EPS" :) ) they define. Does not really answer many questions on individual business units - how much capital is employed, how much good will, what is ROC, etc.

Vinod

This is certainly true about their acct & tax team, the FT ran an article a few days ago about their abilities.  Some have even been reassigned to their accounting firm as part of their restructuring so they can also help other companies while continuing to support GE.

The downside of this prowess is that they expect to be paying a higher tax rate these next few years now that the laws have changed.

As for the stock price I think the story can be simply stated. Management took on a too many things at once while trying to unwind GE Capital.  This was a mistake, but solid assets remain and I think it is priced at a decent risk reward level in the 15's.

scorpioncapital

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Re: GE - General Electric
« Reply #148 on: February 05, 2018, 09:31:33 AM »
I like the gun to head example - this is how all investing should be done :)
Gun to head: GE vs IBM - I'd go IBM.
Gun to head something else vs GE or IBM - something else :)


no_free_lunch

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Re: GE - General Electric
« Reply #149 on: February 05, 2018, 10:29:11 AM »
Gun to head: GE vs S&P500?

I'm going with S&P500 and yes I know how overpriced it is.