Think General Electric Company (NYSE:GE) has bottomed? Keep dreaming. GE stock has given us so many false bottoms that I’ve lost count at this point. But it makes you wonder whether it’s worth nibbling this struggling conglomerate.
I want to be clear up front: I believe in current CEO John Flannery. Flannery is the one that made GE’s healthcare unit one of the few bright spots shining within the company. I have no doubt he will bring GE back to glory. But this is a massive company with a lot of moving parts that are hard to pin down. In a nutshell, the turnaround will take time.
This isn’t a simple situation of, build for X, sell for Y and collect for Z. The accounting here is tricky — as seen by the company’s recent plans to restate two years worth of financials — along with concerns of pension funding and other liabilities. As much as shareholders want to see a bottom in GE stock, these ongoing concerns make that tough.
Higher interest rates could ease its pension obligations, though. Interest rates should continue to rise this year — benefiting banks like Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM), among others — and that rise will help GE too.
But beyond that eventual help, the overall sentiment on GE stock is not very good. Deutsche Bank analyst John Inch has been among the most bearish of the analysts, along with JPMorgan’s Stephen Tusa, who’s been nailing the decline for months. However, Inch argues that GE’s new board increases the likelihood the company resorts to a capital raise.
Companies typically raise capital in two ways, via the equity market (selling stock) or through the bond market (taking on debt). Given the leverage on GE’s balance sheet, one might think an equity raise is the way to go.
Buffett and GE Stock
I actually have a different thought on GE stock when it comes to capital. If the company actually wants to raise capital, perhaps it could work out a deal with Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B). While the move seems crazy at first, consider a few things.
In his recent annual letter, Buffett said he and Charlie Munger are not too thrilled about the company’s $126 billion cash hoard. The treasure trove of cash “earns only a pittance” and is “far beyond” the cash levels they would like to have on hand. As a result, they are looking to deploy that capital.
When you consider Buffett’s past acquisitions and current investments (energy, rails and airlines are just a few), GE could be a fit. Further, his willingness to step into ugly situations — buy when there’s blood in the streets, right? — and “rescue” companies in a liquidity crunch, GE could also make for another reasonable bet. When Buffett did this during the Great Recession with a number of banks, he received stellar deals, allowing him to earn a windfall in profit a few years down the road.
It reminds me of an excerpt from The Alchemists: Three Central Bankers and a World on Fire on banking titan J.P. Morgan:
“During the 1907 banking crises, Morgan was the lender of last resort. He ordered a capable banker to examine the books of a big institution under attack, the Trust Co. of America, to determine whether it was truly broke or merely had a short-term problem of cash flow — the old question of insolvent versus illiquid. Merely illiquid was Morgan’s conclusion. The bankers bailed it out.”
It’s not a perfect comparison as GE’s not facing insolvency, but you get the picture.
Will Buffett Buy General Electric?
GE stock currently sports a $122 billion market cap. Could Buffett acquire the company? With debt, most likely. But I don’t think he’d want to. Instead, he would want a favorable deal. Whether he wants to stay below the 10% ownership threshold, receive warrants at low prices or would be comfortable owning a larger-than-10% stake, I don’t know. I only know that he could provide the liquidity that GE is looking for. He would make a killing, even if GE stock returned to its mid-2017 levels.
But GE would receive more than cash. First, it receives a huge vote of confidence from Buffett, which would no doubt go over well with Wall Street. Second, management doesn’t have to tap into the debt or equity markets. Third, they get Buffett as an investor.
If Buffett were to step in, I think it could mark a bottom in the stock. On that front, GE has been a continual disappointment. Every time it looks like it’s near a trough, the bottom falls out.
I’m not saying Buffett needs to invest before the bottom is reached for GE stock price. We need a rally on bad news (which we’ve had) but we need that rally to sustain for a bottom to be put in. We’ve been lacking follow-through, as only one of these false-bottom reversals went on for more than one or two sessions.
I don’t know when GE stock will bottom, but as with life, I’d rather be casually late to the party than the first one there.