GE, with all its faults, is still a good buy

The Oklahoman (Sunday) - - BUSINESS -

Dear Mr. Berko: My stock­bro­ker wants me to buy 400 shares of Gen­eral Elec­tric. Is he nuts?

— JS, Mo­line, Illi­nois

Dear JS: Last June,

Jeff "Big Melt" Im­melt, who took con­trol of Gen­eral Elec­tric (GE$18.47) from the iconic Jack Welch just be­fore 9/11, an­nounced he'd be step­ping down as CEO. Good! He's been re­placed by John Flan­nery, a 30-year GE veteran who ran the com­pany's health care divi­sion. Huge yawn! Most doubt that Flan­nery and his per­sonal broom can hurry GE's price re­cov­ery. So far, his ap­point­ment has made as much dif­fer­ence to GE as would the ad­vent of another fly to a slaugh­ter­house. That should change if Flan­nery's broom can muck out the ex­ec­u­tive suite and re­move the stench from the Augean sta­bles in GE's use­less board­room.

Rec­om­mend­ing GE at $25 sev­eral years ago was among my big­gest dis­ap­point­ments since buy­ing 250 shares of Stude­baker-Packard in 1962. That com­pany shut its doors in 1966. GE, with $126 bil­lion in 2016 rev­enues and $13.4 bil­lion in prof­its ($1.07 a share), wasn't earn­ing enough to pay its 96-cent div­i­dend, so Flan­nery re­duced it to 46 cents, sav­ing the com­pany over $4 bil­lion a year. GE's not in trou­ble; it just lost its mojo.

GE's es­tab­lished dom­i­nant prod­uct cat­e­gories — tur­bines, lo­co­mo­tives/ trans­porta­tion, light­ing, med­i­cal imag­ing, re­new­able en­ergy, air­craft en­gines and ser­vice con­tracts — do very well. Its ser­vice con­tracts busi­ness gen­er­ates mar­gins in ex­cess of 30 per­cent.

GE's prob­lem is five­fold:

1. In­te­grat­ing the power and grid busi­ness of Al­stom, a French com­pany GE pur­chased for $14 bil­lion in 2015, has proved more dif­fi­cult than an­tic­i­pated. Slow pen­e­tra­tion in the Euro­pean power in­fra­struc­ture is dis­ap­point­ing. Still, 30 per­cent of the world's elec­tric­ity is gen­er­ated by GE equip­ment. Re­cent events sug­gest mod­est suc­cess and prof­its this year.

2. Volatile fos­sil fuel prices are hurt­ing GE's oil and gas seg­ment, an im­por­tant growth plat­form for its slowly grow­ing in­dus­trial port­fo­lio. How­ever, oil prices are ex­pected to re­main at cur­rent lev­els ($55 to $62 a bar­rel) through the first half of 2018.

3. It may take sev­eral years for GE's in­dus­trial divi­sion to re­place the sig­nif­i­cant, al­beit slightly wor­ri­some, earn­ings from GE Cap­i­tal, which Im­melt stupidly un­wound in 2015.

4. Ob­servers be­lieve that in­te­grat­ing oil field ser­vice provider Baker Hughes' busi­ness, which GE pur­chased for $7.5 bil­lion, will be more dif­fi­cult than an­tic­i­pated, as the sale was pred­i­cated on oil's trad­ing at $60 a bar­rel.

5. Fi­nally, big­ger isn't bet­ter. GE is so gi­nor­mous (301,098 em­ploy­ees in 180 coun­tries) that it'll take GE's brain a week to dis­cover that com­peti­tors are eat­ing its tail.

How­ever, GE should slowly stag­ger for­ward, and I'm com­fort­able stag­ger­ing for­ward with a 48-cent div­i­dend yield­ing 2.7 per­cent. If 2018 rev­enues come in at $132 bil­lion and pro­duce prof­its of 90 cents a share — as is pro­jected — GE may even raise its div­i­dend to 50 cents this year. If Flan­nery can hold the reins steady dur­ing the com­ing four years, an­a­lysts be­lieve that net profit mar­gins could im­prove from 8.9 per­cent to 15.3 per­cent. An­a­lysts be­lieve that 2022 rev­enues could come in at $165 bil­lion, that earn­ings could reach $2.20 a share and that the div­i­dend could be in­creased to a buck again. That's a po­ten­tial 5.5 per­cent yield at to­day's $18.47 price. There are quite a few ifs, but if those ifs can reach re­al­ity, afi­ciona­dos be­lieve that GE could trade in the $50s by 2022.

There's im­pa­tient buzzing by some ac­tivists sug­gest­ing the best way to max­i­mize share­holder value would be to di­vide GE into four in­de­pen­dently traded com­pa­nies — deal­ing with med­i­cal imag­ing, air­craft en­gines, oil and gas ser­vice and equip­ment, and power gen­er­a­tion, re­spec­tively — each with prof­itable ser­vice con­tracts. Th­ese four in­de­pen­dent com­pa­nies could have a com­bined share value of $50 to $60 within 18 months.

Your bro­ker gave you good ad­vice. GE's longterm debt is de­clin­ing, while book value, re­turn on cap­i­tal, re­turn on eq­uity and cash flow are im­prov­ing. Still,

GE's board mem­bers have egre­giously failed share­hold­ers and man­age­ment. Th­ese toad­ies, who glee­fully fleeced mil­lions of dol­lars in perks and direc­tors' fees, are re­spon­si­ble for GE's hu­mil­i­at­ing per­for­mance. They should be pil­lo­ried, placed in stocks, pub­licly whipped and then pros­e­cuted for ma­li­cious mis­fea­sance. Buy 400 shares, but hold your nose!

Please ad­dress your fi­nan­cial ques­tions to Mal­colm

Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@ya­hoo.com.

Mal­colm Berko mjberko@ ya­hoo.com

TAK­ING STOCK

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