General Electric: No Power (NYSE:GE)

It has been a long time since I have taken a look at General Electric (NYSE:GE), for that I have to go back to March 2019 when I concluded that a $21 billion biopharma deal with Danaher (DHR) saved the day.

That deal likely threw a lifeline to GE as the troubled conglomerate faced the pandemic as well in 2020. Despite three years of continued restructuring efforts, GE fails to deliver on its promises, making me cautious here as the restructuring continues, with no structural growth or substantial earnings to show for.

Some Background

More than three years ago, GE was already facing real financial hardship as an $8 stock at the time, down a lot from its highs already with the massive conglomerate having racked up too much debt, fueled by its financial activities, creating an outright mess at one of the largest businesses (at the time) in the US.

CEO Lawrence Culp was hired to clean up the business embarking on a string of divestments. The GE Life Science business was one of the pride assets within GE as Danaher was willing to pay $21.4 billion to acquire these assets which generated some $3 billion in sales and nearly $1.2 billion in EBITDA, leaving still a substantial GE Healthcare business remaining with $17 billion in sales.

Following the divestments, the company would see pro forma sales fall to $82 billion as the “industrial” businesses ended the year with 2018 with $47 billion in net debt. This debt load would come down a lot following the deal, although pension liabilities amounted to another $27 billion.

Believing a stabilized industrial business should be able to post 10-15% margins on $80 billion in sales, EBIT might come in around $8-$12 billion as interest expenses and a 20% tax rate might leave earnings of $9 billion (at the higher end of the EBIT range) come in around a dollar per share. These prospects and shares trading at $8 per share at the time, left potential although some heavy lifting would need to be done to create value, as investors were scarred from the past of course.

What Happened?

Shares rallied to the $10 mark ahead of the pandemic, fell during 2020 but started 2021 around the $10 mark again, as the company announced a reverse 10-for-1 stock split in 2021 to create a higher share price. Despite relative good economic conditions for many industrial names in 2021 and 2022, shares have been range bound between $60 and $100, corresponding to $6 and $10 range based on the “old” share price, currently exchanging hands at $88 per share (or $8.80 for that matter).

Results were hard to read into during the pandemic and thereafter. 2020 sales fell to $75.8 billion and in 2021 sales fell further to $74.2 billion. While still being a diversified conglomerate, the business has been unlucky in its positioning as aviation and power were hit by the pandemic and structural headwinds, not offset by the better positioning of the healthcare sector and renewable energy.

Underlying segment profits rose from $3.8 billion in 2020 to $5.8 billion in 2021 and while this looks encouraging, it is way short of my potential estimated above. Moreover, this is before nearly a billion in corporate overhead, interest costs and other items, creating no realistic earnings power.

The company fabricated an adjusted earnings number at $2.12 per share in 2021, but this is only after the reserve split. The balance sheet remains hard to read into given the huge financial liabilities but shrunk considerably from $256 billion in 2020 to $198 billion in 2021.

During 2022, the dismantling continues as GE outlined plans to separate the business into three units: healthcare, aviation, and power (called Vernova) which includes financial activities as well. With the company attaching multibillion in brand value from the name GE, it shows that perhaps even now reality still has not kicked in entirely. The first asset to go are the healthcare activities, set to spun off in January 2023.

2022 – Soft So Far

Through the first half of the year, the company managed to post a 1% increase in sales to $35.7 billion, on the back of the headwind from a strong dollar and some divestments. The business was doing well on the back of aerospace, which posted strong orders and margins, stable sales at healthcare (albeit accompanied by big margin pressure) and relative stability in power. Renewable energy, despite the positioning, was the major trouble child with sales and orders down a lot while losses are increasing, being quite substantial by now.

Amidst all these moving trends GE managed to post adjusted earnings of $1.02 per share in the first half of 2022, up from just $0.35 per share in the first half of 2021, as this only works down to $0.10 per share on a pre-split basis of course. No fewer than 7 adjustments were made to arrive at these earnings numbers, as GAAP losses actually doubled to $1.62 per share. Notably, the second quarter was quite strong in terms of earnings power.

The third quarter was utterly disappointing again however, being a massive negative surprise. Late October the company released a 3% increase in sales to $18.4 billion, with currency headwinds prevailing, as otherwise 7% growth would be reported. That is about the good news as adjusted earnings fell eighteen cents to $0.35 per share, but this comes after a very strong second quarter and generally volatile bottom line performance as of late.

The company cut the midpoint of the adjusted earnings guidance from $3.15 per share to $2.60 per share, as these numbers are highly adjusted of course. This still translates into a sky-high earnings multiple as the business continues to restructure and simplify the business as the balance sheet is shrinking further to $180 billion.

What Now?

The latest operational shortfall comes from renewable energy, which is a bit ironic as higher energy prices should provide a boom to this segment. This tailwind is offset by inflation and warranty issues, among others. Of course, the company will shrink itself even more, including an upcoming spin-off from the healthcare business, but the massive complications in the balance sheet remain with the financial unit, which continues to be part of the remaining GE here, at least for now.

Still holding a tiny position here, which has been flat for years, I am unimpressed with the restructuring story, as debt is coming down, and the business is simplifying. Yet earnings power is not coming to fruition here, with the remaining business remaining too complicated to have any conviction here.