GE – Report Card So Far: C-

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Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

November 13th, 2017

GE – Report Card So Far: C-

  • For someone who has spent 30 years in the company and has had 4 months to pull a plan together, Mr. Flannery is not saying enough today in our view.
    • We like the dividend cut: A
    • While we understand the timing constraints of a spin of GEBH from the original deal, these are exceptional times for GE and we would like to see work done to accelerate that time table rather than just accepting it – we do not like the “optionality” approach – make a decision and get it done! B-
    • The cost cutting goals are fairly pathetic! Ed Breen took almost 20% out of SG&A at DuPont before the Dow merger – GE is proposing less than 4-5% based on what has been discussed today: D-
    • Nothing has been suggested to make the company more transparent and easier to model for investors, though the admission that the company is too complex (at last) suggests a step in the right direction: C-
    • Not enough candor on the fundamental issues facing power, wind turbines, transport and capital and how to fix: C
  • The dividend cut is a positive sign on the “corporate self-awareness” side as it is an indication that the company recognizes some of the secular nature to the cash flow problems – things that cannot be fixed overnight and may take years.
    • It is also a negative for the same reason, however – there are problems with many of the businesses and this calls into question what the company can earn in 2018 and 2019 even with cost cuts.
      • It is vital that the 2018 earnings and cash flow guidance is, best case, conservative and worst case, accurate – further misses from here would be taken very poorly.
    • The positive is that GE is now unlikely to “fire sale” businesses to pay the dividend and can afford to do something tax effective with “Transports” as we have suggested.
  • Given the recent history of GE and that Mr. Flannery is an insider, we are unhappy with lots of partly baked plans and a general “trust me”. This has not served GE investors well in the past.
    • Strong and precise cost cutting goals are important as these will either help grow earnings or limit the earnings decline while some of the longer-term business initiatives are progressed.
      • Air Products adopted a granular and aggressive cost focus in the first two years after Seifi Ghasemi took over – while fixing other operational, business focus and alignment issues.
    • This disappointing analyst day needs quick follow-up with some concrete plans – like a Transport deal – like the consolidation of wind turbines into “Power” and the acceptance that the power industry is evolving into a regional “solutions” based business and away from a large combined cycle turbine business.
      • Some of these moves should lead to significant write downs in Q4 and through 2018 so reported earnings for the next 15 months could be negative.
  • Going back to our “habits of good companies” – we are fairly certain that good companies do not delay press releases until the 11th hour – in this case 15 minutes before an analyst meeting begins.
    • There is a subliminal message of subterfuge or smoke and mirrors when you give investors data and other information at the last minute.
    • This is not the behavior of a company that seeks and needs “candor”; needs to change.
      • While on this subject we reiterate our view that GE’s investor website is the worst of any major Industrials and Materials company – it is a deterrent rather than an aid – hard to navigate and lacking almost anything of value.
      • For example – hours after the announcement, GE dividend news does not feature on GE home page or the GE Investors home page.
  • Investors reacted very positively to Mr. Flannery’s words after the quarterly earnings call, but later, as the data set in and the risk to the dividend became apparent, that confidence ebbed quickly and badly.
    • We expected the GE team to be slicker and more articulate today than it was – but the substance of the presentation is what matters and it is broadly underwhelming.
    • The style looks like the old GE style – should have changed tack here – new management, new style.
    • There is no over-arching logic around why Healthcare, Aviation and Power belong together.
  • Today you have as stock with a lower dividend and with lower earnings and not enough confidence that management understands what it will take to turn around the businesses with problems and no logic as to why it should all stay together.
    • Now the tax loss selling kicks in and the stock could underperform for the rest of the year.
    • Revisit in January.

©2017, SSR LLC, 225 High Ridge Road, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein.  The views and other information provided are subject to change without notice.  This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results.

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