To put the General Electric Company (NYSE:GE) quandary into perspective and properly evaluate the GE stock story, it’s useful to remember 2016’s docudrama Sully. The movie depicts the 2009 landing of US Air flight 1549 on the Hudson River, Tom Hanks’ character Chesley “Sully” Sullenberger abruptly and effectively shuts down what is shaping up to be a witch hunt.
Realizing the NTSB is using computer simulations as a misguided means of pinning blame on him and his co-pilot Jeff Skiles, Sullenberger simply asks “Can we get serious now?”
It’s the beginning of the movie’s big pivot that ends up vindicating Skiles and Sully, both of whom were fighting for their job and reputation.
It’s a powerful question that applies to the debate regarding GE’s future and the opinions that have surfaced about the stock’s true current and projected value. This especially is true as opinions get tossed around given the motion of GE stock just within the past few days. Can we get serious now?
Running out of Options
The backstory needs little telling. The once-iconic company has struggled to find its place in the new, mostly-digital world, leading it into a string of bad decisions.
Among them was putting Jeff Immelt at the helm in 2000. Immelt, we now know, largely insisted on a success theater that masked problems rather than addressing them. Under his leadership, issues festered into unsolvable problems.
The only viable option at this point is, according to most, a breakup of the company into its basis pieces to leave behind something that’s more manageable.
We’ve already seen it to some extent. The creation of Baker Hughes – A GE Co. (NYSE:BHGE) is one step in that direction. In May, GE Transportation was sold to Westinghouse Air Brake Technologies (NYSE:WAB) also known as WabTech. Most recently, the company’s aircraft financing arm has been suggested as a potential divestiture.
And it’s that potential sale of GE Capital Aviation Services, or GECAS, that’s rekindled a concern for GE stock holders. Under duress, General Electric may not be getting top prices for any divisions it aims to sell.
J.P. Morgan’s Stephen Tusa made the call on Wednesday, saying, “An apparent inability to sell [GECAS] after being shopped now twice in the last 6 months … or a sale below book would not only be not positive but could suggest more desperation to bring cash at any cost.”
Gordon Haskett analyst John Inch, however, took the idea a step further to also say in a note published Wednesday:
“By subtracting asset sale proceeds from total company liabilities of $225bn to $274bn, we derive total company (post sale) liabilities of $144bn to $203bn. After then incorporating the market value of the Industrial assets ($71bn to $78n) and Capital assets ($111bn to $129bn), we impute a value for GE equity between -$2.47 to +$7.11, or just over $2/share at the midpoint.”
In other words, GE stock may be (literally) worthless… an idea that may only become clear after it’s further pared down.
Can We Get Serious Now?
Tusa’s point is well taken. GE is desperate, and as such isn’t likely to be commanding prices it would like for its properties. Inch’s math is difficult to argue with too.
But, can we get serious now?
Despite its myriad of problems, this is General Electric, an outfit that’s been part of the world’s industrial landscape for over a century. Certainly other fixtures of our social and business fabric have come and done. Sears Holdings (OTCMKTS:SHLDQ) comes to mind, as does Kodak. It happens.
GE isn’t a Kodak though, nor is it a Sears. It’s also not a Blockbuster or a Pan Am. It’s a company that has revenue-bearing and profit-bearing vehicles at its disposal. They’re just being driven poorly, and in the wrong direction. That, in the grand scheme of things, is a relatively easy fix for a team that knows what to fix and how to fix it.
The difficult (though not impossible) part, of course, is finding that team.
And underscoring just how little analysts really collectively know about the company’s plausible future, price targets for GE stock range from as low as $6.00 to as high as $36.00.
Soak that in. The pros are saying GE could be worth anywhere between $6 and $36 per share, and that’s without factoring on John Inch’s suggesting that shares are worth something around $2.00 each. The General Electric name alone is worth more than that, even after subtracting all the company’s liabilities.
Bottom Line for GE Stock
None of this is to suggest one should or shouldn’t trade GE. Indeed, it’s undoubtedly well positioned to dish out the wild swings most swing traders love, even if longer-term investors aren’t interested.
It’s also not to say General Electric can or can’t grow its way out of trouble. In that light, Tusa was onto something: asset sales alone aren’t apt to be enough. It will have to grow the top and bottom lines conventionally with the assets it’s not selling. Maybe that will happen, and maybe it won’t.
The big take-away is, take any conventional analysis and valuation modeling here with a grain of salt.
The number-crunching and the speculation is mostly irrelevant, with the pros only able to take their best-guess as to what lies ahead for this (fast) moving target. Even Inch’s math leaves room for a wide array of plausible values, all of which assume the company won’t be doing anything differently a year from now. We know that’s not likely to be the case.
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.
