GE: Why Would You Trust This Team?

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Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

January 24th, 2018

GE: Why Would You Trust This Team?

  • As we have written countless times in the past, GE has been one of the guiltiest in the Industrials and Materials space of corporate Optimism – resulting in a history of over-promising and under-delivering.
    • Exhibit 1 shows both 5 and 10 year histories and measures the difference between actual earnings and those projected at the beginning of each year. The analysis only makes sense if you use an average over time as any given year can be impacted by factors outside management control.
    • Exhibit 1 compares GE with its Conglomerate peers – Exhibit 2 shows GE’s annual history from 2010 and Exhibit 3 shows 2017 by quarter versus beginning quarter estimates.
  • Focusing on Q4: we had a new management, with the opportunity to provide conservative Q4 guidance 6 weeks before the end of the quarter – and they still got it wrong! “Say hello to the new boss – same as the old boss, maybe.”
    • Cash flows were better, which may be a good sign but could just as easily be a one off.
    • The SEC investigation into the insurance write-down may be contained, but it may not be and here is another risk.
  • Accounting problems aside, we would still focus on the business fundamentals in Power, Transport and possibly Wind as reasons why it is hard to trust guidance for earnings in 2018.
    • A break-up now is problematic because the businesses that can stand alone provide the cash needed to pay the dividend and support those than cannot stand-alone.
  • At this point Mr. Flannery’s credibility has to be a concern and we would be watching the announcement of the new board to see whether any of the additions are possible credible replacements should things not turn around quickly.
    • The addition of someone like Ed Breen to the board would probably create support for the stock. Without something like this we suspect the earnings and other news flow remains disappointing – and the stock moves lower.

Exhibit 1

Source: Capital IQ and SSR Analysis

Exhibit 2

Source: Capital IQ and SSR Analysis

Exhibit 3

Source: Capital IQ and SSR Analysis

Exhibit 4

Source: Capital IQ and SSR Analysis

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