The human brain is a wonderful construct, ceaselessly
recording inputs, sorting them, storing them, creating links for faster and more
meaningful future use, and at times making jumps which can be baffling, one
moment weighing the merits of an investment in GE and the next remembering a slightly
salacious Colombian joke.
Which joke? That of the
philandering husband caught in flagrante with his mistress in a motel room by
his wife. Sobbing, screaming, in pain,
his wife keeps asking:” How could you do
this to me!” The hard-pressed
husband, denying any infidelity but running out of arguments, finally demands:”
Are you going to believe your eyes, or
are you going to believe what I am telling you?”
So where is the connection between his situation and GE’s?
When the GE stock price fell into the $7-$9 price range, the
whole company became worth no more than its aviation unit[1],
a natural benchmark being Safran SA from France, its joint-venture partner in
the commercial jet business. Safran SA has
a market value of $56 billion with revenues which are ¾ those of GE Aviation.
GE’s Healthcare unit remains very healthy and profitable; in a
12/3/18 article, Barron’s valued it
at $60 billion.
GE has retained a 50.1% stake in Baker Hughes which is worth
over $12 billion at today’s stock price.
It is about to sell its Transportation unit for over $3
billion. Its Renewable Energy unit is
probably worth that much or more.
So far, these units add up to a lot more than $74 billion. Factoring in GE’s Industrial net debts (i.e. using enterprise
values rather than market capitalizations as benchmarks) lowers valuations, but not conclusively.
The big negatives though are the Power
division and GE Capital. Here, the
quarterly conference call of today was helpful in shedding light.
GE’s CEO stated that while he wouldn’t absolutely guarantee
that all skeletons had been removed from the GE Capital’s closets, he felt that
there shouldn’t be any new material liabilities beyond those which had already
been identified.
As for Power, while its 4Q18 revenue were down, its results in
the red and the global market was still shrinking, GE’s CEO felt that it could
reduce production capacity to better match expected demand and improve
management to shore up results.
While GE is not out of the woods, it no longer appears in dire
needs of funds, there shouldn’t be more large skeletons in the closets, its top
management ranks have been upgraded and it is moving decisively to get into
shape. That is not to say there are not major liabilities, rather,
that, by now, there are fairly well quantified.
The unfortunate wife of the joke was asked to believe her husband’s
denials. GE shareholders, so far, have been asked to
believe short term pessimists. Instead,
they all should believe their eyes.