General Electric – A 2020 Update

A long-standing reader of my blog called me last week asking whether I was going to be writing an annual update on General Electric. For those of you not in the know, I’d recommend reading my original post detailing the history of the company (you can find a link here) and then reading this article I wrote back in 2019 covering the allegations levelled against the company by Harry Markopolos.

Today, I’m re-visiting General Electric to see what’s happened since Harry released his article and what I think the next twelve months will bring for the company.

If we re-wind to August 2019, you may remember that Mr Markopolos released a report alleging that GE is engaged in accounting fraud and that once the fraud is revealed, it is inevitable that the company will collapse into bankruptcy. I vaguely recall a quote from an interview where he said something to the effect of GE being “one recession away from bankruptcy”. By my reckoning, the current economic environment resembles a dramatic recession – as of August 2020, global GDP is in freefall, economic activity is collapsing around the world and corporate bankruptcies are running at an elevated pace.

The report Mr Markopolos produced centred around the long-term care insurance policies issued by GE Financial – a sub-division of GE – which Mr Markopolos claimed would incur enormous losses when policy holders started filing claims. It went into some detail about why funds set aside for these claims were insufficient and went on to say that due to the declining cash flows and financial struggles facing other parts of the conglomerate, these policies would eventually collapse the entire company.

At the time the report was released, Mr Markopolos gave some pretty hard hitting interviews where he essentially stated the company’s collapse was a foregone conclusion, nothing could be done about it, and the company was conducting accounting fraud in an attempt to cover up the truth. In return, GE CEO Larry Culp bought a few hundred thousand dollars of GE stock, and a few commentators stepped forward to say Mr Markopolos had got it all wrong. After a few weeks, the story dropped out of the headlines and the world continued on.

What has happened since then?

If we look at GE’s share price, it sat at $6 on August 15th 2019, rose to a high of a little over $13 in February 2020, then came back down to rest at around $6. After the report was released, there was naturally a lot of interest, and a huge number of reporters, accountants and actuaries combed through the document and as far as I can tell, rejected the claims as being entirely without merit.

If you look at GE’s balance sheet, in Q1 of 2019, GE had $73bn of cash and cash equivalents and around $110bn of debt, giving them a net debt of around $40bn. If you fast forward a year to Q1 of 2020, they had nearly $90bn in cash and only $88bn of debt. So in just a single year, the company has gone from having $40bn more in debt than cash, to having more cash than debt.

They’ve done this by going on a terrific selling spree; they’ve sold multiple divisions and used the money to pay down their debts. Of the $88bn they came into 2020 with, only $5bn is due this year and only another $6bn is due in 2021. This is a much stronger picture than the media would have had you believe and doesn’t indicate to me that the company is in danger of crashing into a default.

I’ve been following the company for nearly three years now and keep hoping that they manage to pull through and keep going. The company is still operating at a multi-billion dollar annual loss and revenues are still in freefall (as one might expect for a company trying to sell everything not nailed down). The global pandemic will cause their aviation business significant challenges, and the collapsed oil price will be causing a headache for their energy businesses. Having said that, CEO Larry Culp has said the business is making significant progress on reducing costs and preserving cash, and believes there is still a cash flow positive future for the company.

Mr Markopolos was rubbished for over ten years whilst investigating Bernie Madoff, but it turned out he was right all along. Whether his work on GE will turn out the same way remains to be seen.

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