Of brain waves and electric dreams

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.

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[1] $60 to $80 billion vs. $56 (Safran mkt value)/0.75 or $74 billion.