For most of the 20th century, General Electric was a symbol of steady investor returns. But the onslaught of a tech-dominated 21st-century market, a stint of bad strategic decisions and a bleeding finance arm (GE Capital) that never quite recovered from the 2008 financial crash, has meant that the company is becoming increasingly tired.
After clawing itself back to the $32 mark in mid-2016, up from $7 following the financial crash, the stock is now once again below $10. Since the start of 2017, its price has lost around 75%.
GE share price performance, NASDAQ interactive chart, as at 22 November 2018
As a result of the steep losses, the company was removed from the Dow Jones Industrial Average in June, which it had been part of since 1907. In the 1990s, GE had the highest market cap in the world. It’s now trading at the same price as in 1995 and is under investigation by the SEC.
Mounting debt and “urgent” restructuring
On 30 October, GE announced its Q3 earnings at $0.14 a share – $0.6 below forecasts and down 33% from the same period in 2017. Revenue of $29.57bn was below expectations, while it was also forced to slash its quarterly dividend for the second time this year, to $0.1 per share in a desperate effort to free up cash. As recent as last year, the dividend was at $0.24. The withering firm expects to gain about $3.9bn per year as a result of the cut.
|Revenue percentage change, Q3 YoY||+14%|
|Earnings per share (EPS) percentage change, Q3 YoY||-9%|
|PE Ratio (TTM)||10.28|
GE stock vitals, Yahoo finance, as at 22 November 2018
The conglomerate is also a shadow of its former self as it continues to be dismantled as part of the effort to raise funds, decrease its mounting debt of £115bn and plug a hole in its pension fund.
Despite a long standing policy of making the company much leaner, new CEO Lawrence Culp – the first outsider to be appointed CEO in GE’s 126-year history – has induced a new sense of urgency to rid GE of its failing assets.
Culp takes GE in new direction
Heading into his first earnings call, Culp put on an admiral effort to reposition the company’s priorities after just 30 days on the job, and made headlines after he bought himself $2.2m worth of company stock at the start of November amid a stock price fall of over 19% during the course of the week.
“Certainly, the strategy is to de-risk the portfolio by tending to the balance sheet as quickly as we can, and I hope today’s move with the dividend reflects this,” Culp said during the Q3 earnings announcement. He added that, with no plans to raise equity, slashing the dividend was the obvious move.
In an attempt to raise cash and make the company’s portfolio more lean, Culp said he would continue deleveraging by splitting GE’s power division, which posted a quarterly loss of $22.8bn in October, into two. It will be comprised of a gas and services business, and a new business made up of the remaining power assets.
But CNBC’s Jim Cramer is just one voice that remains unconvinced: “A hideous balance sheet and slowing fundamentals are a toxic brew that can put your dividend in danger,” he said.
And Cramer’s lack of faith is one that many in Wall Street appear to share, with the company’s debt becoming an increasing concern. It has near $8bn of bonds due for payment in 2019 and $25 billion in 2020 and 2021. In October and the start of November, the ratings agencies all downgraded GE’s credit rating to BBB+.
Sell, sell sell
In an attempt to sure up the business, going forward, GE will shed its healthcare and oil-field businesses to concentrate on power, aviation and wind turbines. It’s also on track for $25bn of asset reductions in GE Capital, the Achilles’ heel of the company, and expects a big tranche to be sold off at the end of the quarter.
However, some analysts are concerned whether this will be enough, as prospects of rising taxes, falling bond prices and rising credit-default swaps push the company closer liquidity.
Most recently, on 13 November, GE cut its $9bn tax bill to $3.3bn, the yield of a $5.6bn debt jumped by 13.1%, while an $11.4bn bond maturing in 2035 climbed to 6.19% and its credit-default swaps jumped to over 20 basis points to 202.26.
In light of all this, analysts are downgrading their price estimates. On 9 November, GE’s shares went down as much as 10% after a JP Morgan analyst – Stephen Tusa – cut his stock price target to $6 from $10.
But not all share Tusa’s outlook. Jim Corridore, senior equity analyst at CFRA Research, for instance, argues that Culp is the key to turning the company around. Corridore believes that Culp should move away from selling assets and using credit lines to bring down its debt and instead use the cash from its operations.
It also shouldn’t be forgotten that GE remains a behemoth of a company. It might not be profitable, but it still sits at number 18 on the Fortune 500 list.
“The strategy is to de-risk the portfolio by tending to the balance sheet as quickly as we can.” - Lawrence Culp, GE CEO
Fundamentals behind decline
The industry points to Jeff Immelt, GE’s CEO from 2001 to 2017, for the company’s struggles, given a wide range of perceived bad decisions and deals made during his tenure.
During Immelt’s time at the helm, GE made 380 acquisitions that came at a cost of more than $175bn, and it also sold off 370 assets worth a total of $400bn.
Total cost of the 380 acquisitions Jeff Immelt – former GE CEO – made during his tenure
For the most part, the deals proved more expensive than expected. The bonanza came to a climax with two botched takeovers in the power industry: a widely criticised and overpriced majority 62.5% stake in oilfield-services company Baker Hughes [BHGE] in 2017 that resulted in GE combining its oil and gas business with the company, and the purchase of the power and grid division of Alstom [ALO] in 2014.
Neither takeover has panned out well for GE. Its stake in Baker Hughes will be sold over the next two years, while the Alstom deal has resulted in a $22bn write off from the value of its power business, as well as an investigation by the US SEC and Justice Department over its accounting.
More widely, the company never really fully rebounded since the financial crisis and has in fact been long turning out the lights on its businesses to pay for debts that date back to this time.
One of the first businesses on the chopping block was its nurtured media consortium, which dates back to the 1890s when Edison (GE’s founder) invented the motion picture camera. NBC Universal was sold to Comcast [CMCSA] for $16.6bn through a series of deals in 2013.
Value of NBCUniversal and Comcast deal
Next to go out of its storied businesses was its microwave, fridge and washer business, which was sold to China’s Haier [1169.HK] for $5.6bn in 2016.
GE businesses to watch - innovation key to growth
GE plans to stay relevant, and meet the challenge posed by the tech giants that dominate today’s market, by calling itself the world’s first “digital industrial company”. Whether it will be able to achieve this will be paramount to any possible rebound in stock value.
To do this GE is expanding into new technologies such as 3D printing. Its GE Additive and GE Aviation businesses are making significant progress in producing aerospace components using the technology. It made $27bn in revenue in 2017 and has remained strong through the third quarter, reporting a 25% increase in profits from last year.
Amount GE Aviation made in revenue in 2017
Another area that’s performing well is GE Renewable Energy. Its cherry-picking has started to pay off as it hopes to capitalise on the coming boom in offshore wind power with the help of Enron Corp’s wind-turbine business, which was picked up in a bankruptcy auction in 2002.
In a slight scatter-bomb approach, the company has also made strides into the autonomous vehicle sector, launching a new company - AiRXOS - to create traffic management systems for unmanned aircrafts. It has also invested in Canadian driverless startup Clearpath Robotics.
Developing opportunities within GE’s new strategy
The demise of GE has been fast. As a former industrial titan, it has been a force in the market for more than a century, but now dominates headlines for the wrong reasons.
Its mounting debt, investigations by US regulators, the continuing sell-off of iconic businesses and the revolving door of CEOs have all added fuel to the fire.
But there’s still hope that GE can turn things around. During the third quarter, it saw industrial revenues increase by 1%, which was driven by renewables, aviation, healthcare, oil and gas.
“Our overall orders were up 13% organically with service orders up 5%,” Culp said in the Q3 announcement. “Core revenue was up 1% organically with increased commercial engine shipments in aviation, onshore wind turbine deliveries in renewables, and, in healthcare, we saw growth in our developed markets and in life sciences.”
As GE comes to the end of its so-called ‘reset’ year, a number of developments appear to be gambles. Some, however, are starting to pay off.
“Our overall orders were up 13% organically with service orders up 5%.” - Lawrence Culp, GE CEO
With a leaner portfolio and efforts to strengthen the balance sheet, GE had promising growth in its four main sectors, while its digital industrial transformation is delivering productivity gains, shorter manufacturing cycles and reduced machine downtime.
“It’s not going to happen overnight. It’s going to take some time, but I’m hopeful that we can build back credibility and deliver that performance over time,” Culp said.
But the jury remains out: short positions sat at an eye-watering $958m earlier this month, a massive increase from December 2017’s $238m level.