Dec 8, 2018

General Electric: Now What?

By Eddie Gunn

The beleaguered industrials giant General Electric (GE) officially made the painful 92% dividend cut on Friday. The stock has fallen by more than 60% this year and the company has acknowledged that many of its regular investors have abandoned the stock. But there could be more pain ahead as analysts have warned that the struggling company’s turnaround could be slow, difficult and lengthy process.

HalfBridge Business, GE Stock, General Electric
Image courtesy of Pixabay

GE can take several paths forward, including increasing its focus on GE Aviation which is arguably its most successful business. The company is by far the leading maker of aircraft engines which, by partnering with companies such as Safran, has installed engines in 70% of the world's narrow-body jets. The unit has posted a strong 22% profit margin and solid earnings growth of 25% in the latest quarter.

The company also needs to work on improving its accounting and transparency by improving the forecasting and reporting systems. The fact that the company decided not to provide guidance for 2019 shows that either the company has little confidence in its ability to predict the near-term future or it believes that a realistic guidance might spook investors. A Bloomberg noted, the company needs to provide a realistic estimate of long-term care liabilities, work on improving segment earnings reporting, and provide a better GE Capital cash shortfall estimate which includes the impact of U.S. tax reform and the Justice Department’s investigation into the company WMC subprime mortgage business.

The company, however, is drowning in debt with a massive $115 billion debt load and needs asset sales. Some of the bonds of the once top-rated blue chip conglomerate are already trading like Double B rated junk debt. The company needs to continue selling assets but in its desperation, it will be difficult to fetch a great price. The company raised $3.8 billion from the sale of Baker Hughes which failed to have a meaningful positive impact on GE stock, although the sale of the oilfield services firm coincided with the plunge in oil prices. The company also has a healthcare business with a number of valuable assets which it can monetize.

GE, however, has decent liquidity, with $13 billion of cash reserves and has a $19.8 billion credit facility. It likely won’t go bankrupt anytime soon but it has rattled the market and it could take a while before it regains investors’ confidence.

Further reading: CNBC, Reuters, Bloomberg.