GE: Cash Rich, Strategy Poor

GE {GE}: Cash Rich, Strategy Poor-Source 24/7 Wall Street.

GE (NYSE:GE) will pick up close to $8 billion in net cash as part of its deal to pass a majority interest in its NBCU unit to Comcast (NASDAQ:CMCSA)leaving the conglomerate with 49%. GE has not done much with the businesses that will be left when its entertainment business is gone, so investors will have to ask if a cash-based balance sheet improvement will do anything for the firm’s share price.

GE’s stock is still 55% below where it was two years ago compared to the DJIA which is off about 20% during the same period. That is an abysmal performance for a company that was once considered the best run large firm in the world.

GE will still be left with a motley group of businesses, except, perhaps, for its large infrastructure operations. Concerns about the company’s capital finance balance sheet have not gone away but have abated some. At one point there was a fear that {it's balance sheet problems} could take GE under. In the September quarter, revenue at the unit took a terrible fall from $17.3 billion in the same period last year to $12.1 billion this year. Operating income fell even further from $2 billion to $263 million. GE has made a reasonable case that it is not facing huge write-downs in its financial portfolio from consumer credit assets, toxic instrument holdings, or commercial real estate. But, GE has not made a persuasive argument that earnings at the division can recover quickly.

GE’s real revenue and earnings engines are its technology and energy infrastructure businesses. The company’s energy and oil and gas businesses have been hurt by lower equipment sales. GE’s technology operations have been damaged by slow sales of aviation, healthcare, and transportation products.

GE’s challenge in making a case to Wall St. is based on the argument that it is better off without NBCU. The divesting of the entertainment and news operation will help it focus on “core” business. The flaw in the argument is that these core businesses are not growing any faster than global economy and in some cases are lagging. GE’s earnings may be nothing more than a proxy for worldwide GDP. If so, the company has no story to tell.

Link:  http://247wallst.com/2009/12/03/ge-ge-cash-rish-strategy-poor/#more-54878We talked about GE in a series of articles back in February.  In my final analysis piece I said this:



"....However, it is my opinion that GE is not the company that it once was. It is now apparent that there has been more risk on its balance sheet through GE Capital than investors once thought. This is likely over time to compress its stock market multiple. I therefore believe that should GE get back to those $20 levels, investors should reevaluate their long term commitments. We will again review the stock for you should it at some point in the near future advance to those levels."
Link:  http://lumencapital.blogspot.com/2009/02/ge-analysis-part-vi.html

I have seen nothing in the past year to change that assessment.  I think GE will continue to be a solid blue chip company with a low single digits growth rate.  It will likely work to continue to increase its dividend which currently pays about 2.5% and should be able to grow its stock price between 4-10% a year in a good economy.  Now if it can do that rate of growth longer term ,that is not so bad for appropriate types of investors as it would imply a total return based on today's price and dividend of 6-12%.  But unless GE changes its strategy, its glory days as a quasi-growth stock seem likely behind it.

Link:  http://247wallst.com/2009/12/03/ge-ge-cash-rish-strategy-poor/#more-54878

*Long GE in certain legacy client accounts.  Long GE options in one client account.  Nothing here should be construed as investment advice or a recommendation to buy or sell GE stock.