To say General Electric (NYSE:GE) has taken investors on a wild ride this year would be a considerable understatement. After tumbling more than 60% between the beginning of the year and October, GE stock has almost been cut in half again. Thursday’s news that it was selling most of its stake in its ServiceMax software business cut into that loss by a measurable amount, but still … is GE stock a buy right now? I don’t think so.
Between the sheer scope of the drubbing and another much-cheered divestiture, GE has nabbed the attention of even some of the staunchest “never GE” crowd. This is, after all, General Electric. If nothing else, the iconic name is something that can be leveraged, or at least sold.
Before any bargain hunters take the plunge thinking 2018 was as bad as it gets, however, they may want to digest the possibility that 2019 may not be any prettier.
Not a Quick Process
It’s not a story most of the investing world doesn’t know ad nauseam by now. General Electric was managed (secretly) sloppily for years, racking up too much debt that was ultimately invested ineffectively. Now, the company is sitting on $115 billion worth of long-term liabilities and not enough revenue-generating capacity to show for it.
The situation has cost two CEOs their jobs, and the newest chief — former Danaher (NYSE:DHR) CEO Larry Culp — began his tenure in October under intense scrutiny. His plan, though, is more or less the same as the company’s previous heads. That is, sell assets and business units until GE’s debt burden is manageable.
Easier said than done. Two hurdles stand out above the rest.
First but not foremost, the divestiture plan is a long-term one. While the company has shed part of its transportation arm to railroad equipment outfit Westinghouse Air Brake Technologies (NYSE:WAB) — you know it better as WabTec — and announced it was selling all but 10% of its stake in inventory and workforce management software company ServiceMax, the plan is still going to take a long time to make a meaningful impact.
As exciting and encouraging as the ServiceMax news is, it’s also relatively meaningless. General Electric only paid less than $1 billion for ServiceMax back in 2016. It’s added value to it since then, but it’s unlikely the undisclosed details of the sale to private equity firm Silver Lake are going to make a dent in GE’s total debt.
UBS analyst Steven Winoker, who is optimistic about GE’s recovery potential, believes the company will be able to shed its remaining stake in Baker Hughes A GE Co. (NYSE:BHGE) in 2019. But, the game-changing sale of GE Healthcare won’t likely happen until 2020. Winoker doesn’t believe General Electric’s leverage will be pared back to only about two times its net debt until 2022.
Second, and far more problematic to existing and prospective owners of General Electric stock, the company is barely-profitable in the meantime, and will be selling assets that may well be driving the positive cash flow it so desperately needs now.
It may also be selling those assets for less than what they’re worth.
Poor Pricing Power
Not that his predecessors didn’t allude to the same, but when Culp reiterated in November that the company’s divesture plans were urgent, he may have inadvertently indicated just how desperate General Electric is. As ICON Advisers’ portfolio manager Jerry Paul put it, “You’ve just told the world. What if these go off at fire-sale prices?”
Paul isn’t the only one worried that Culp may not get adequate offers for the pieces of GE on the chopping block. JP Morgan’s analysts suggest “Asset value is overstated in looking at headline assets on balance sheet.”
BMO Global Asset Management’s Daniela Mardarovici agrees, opining “They have the ability to spin off the healthcare business, and in principal they have a lot of valuable assets. But the market is no longer willing to take that at face value. They want to see the proof.”
And time may only make things worse in terms of valuing its divisions.
Last quarter, revenue for its Power division was down 33% year-over-year, accelerating the decline seen earlier in the year. Its healthcare unit is still a cash cow, but it demonstrated no net growth. Lighting and transportation revenue were down too, for the quarter and year-to-date.
There were and are bright spots, to be fair. Its Oil & Gas unit and its Aviation arm are growing. But, overall, revenue, earnings and cash flow are all fading. GE is desperate, and prospective buyers of its businesses know it. It’s unlikely Silver Lake paid much in the way of a premium, primarily because it knew it didn’t have to.
In the meantime, asset sales will not only take time, it will give the company time to watch its debt situation worsen, and become more — relatively — expensive. Its debt is toying with being downgraded to “junk” status, which not only makes refinancing a more expensive maneuver but makes its debt unmarketable.
Bottom Line for GE Stock
Again, none of this is to suggest General Electric is beyond salvaging. It’s not even to suggest GE should attempt to fix what’s broken rather than sell pieces of itself. If the company could fix what wasn’t working, it likely would have done so by now.
It’s simply a caution to General Electric stock owners that whatever solution the company’s management team comes up with, it’s not going to fully take shape by the end of next year. This is a multi-year process, and GE continues to bleed in the meantime. The ServiceMax sales is only one of many that needs to be made, and it’s a relatively small one at that.
Wise investors are keeping their expectations in check.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.