Every time it seemed General Electric Company (NYSE:GE) couldn’t fall any more this year, it’s crashed. While the rest of the market has been having a party in 2017, GE has been going from disaster to disaster. New CEO John Flannery, who replaced the now scandal-tinged Jeff Immelt in August, is now beginning the inevitable process of cutting perks and laying off managers. GE earnings, too, didn’t do much to quell investor fears.
Among analysts, the mood is grim. GE stock is said to be in a death spiral, with Goldman Sachs Group Inc. (NYSE:GS) predicting a cut in the 24 cent per share dividend. Further, the GE earnings prediction of $2 per share for 2018 is said to be unattainable, and the chief financial officer was shown the door.
Even workers are revolting, with a suit against the company alleging self-dealing by its 401k retirement plan.
Should anyone want this dog of a stock?
Can GE Survive?
GE earnings were released this morning, and expectations leading into the report were decent, with net income of 50 cents per share and a “whisper number” that’s even higher at 52 cents, on revenue of $31.93 billion. There were still more analysts saying buy it than anything else.
The final numbers were seen as a disaster. GE earnings were just 29 cents per share. Traders who had not hedged because they weren’t warned were caught out. Jim Cramer, who admitted he held GE stock from when it owned NBC, went on an epic rant against Immelt.
Immelt told anyone who would listen he was building a tech company when he was building an energy company. In his interview after earnings, current GE CEO Flannery used the word “technology” repeatedly. While a lot of its oil assets are now partly spun-out into Baker Hughes A GE Co. (NYSE:BHI), under former GE executive Lorenzo Simonelli, but GE shareholders still own 37.5% of the second-largest oilfield services operation, a huge cash drain.
It’s this cash drain that has many worried that the next shoe to drop at GE will be the dividend. GE now has $104 billion in long-term debt, on $355 billion in assets, and that debt service must be paid. But free cash flow has cratered. Operating cash flow was near $20 billion in 2015. For the first two quarters of 2017, it is less than $3 billion. And GE’s holdings in BHI are worth under $20 billion.
This has led JP Morgan Chase & Co. (NYSE:JPM) analyst Stephen Tusa to write that “the fun’s just getting started” at GE, and that this will be no fun at all for shareholders. Trian Fund Management co-founder Ed Garden has been recruited to the board.
The $2 billion per year cost-reduction target set in March looks insufficient to meet the cash flow needs. Eliminating the dividend would save another $2 billion per quarter. Meeting debt service on $104 billion when interest rates seem poised to rise still looks like a stretch.
Don’t Panic
While other analysts are saying it’s time to panic, I wouldn’t sell GE stock if I still owned it. (I got out in January at about $31 per share, and wrote about it.)
What Flannery says about the future, no matter what he says, is going to look optimistic, and that will keep the shares from collapsing no matter what the numbers are.
The fact is that people buy the future, not the past, and a lot of bad news is already in GE stock. The company should still book revenue of nearly $120 billion. It still has a huge asset base. The businesses it owns are underperforming, but they’re still making some money, so there are things Flannery can do, things he can sell, that would keep the company afloat.
The worst thing that could happen tomorrow is a complete corporate breakup, and for shareholders that may be the best news of all. Separating the technology from the energy-related businesses would leave parts worth more than the whole, in my view.
If you’re still in GE, don’t panic. Yet.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
