I must confess to being absolutely fascinated by the on-going saga of General Electric. Originally founded in 1892 by Thomas Edison, the company employs more than 300,000 people and is structured as a conglomerate, with about 12 divisions including GE Aviation, GE Power and GE Capital. It holds diverse interests including healthcare, transportation and lighted
Once one of the world’s biggest and most prestigious companies, valued at over $500bn in 2000, it has now lost more than 75% of its value and is still falling from a peak share price of more than $55 dollars down to less than $8 today.
It’s not exactly a secret to anyone that follows the markets that the company has had an absolute monsoon of bad news for over a decade. A finance division running out of control, an accounting scandal, a debt crisis, a cut in their dividend to just a single cent a quarter, losing access to the commercial paper market, collapsing revenues – it really makes me wonder how this company is still standing and how much longer it can possibly survive.
In this article I’m going to explore some of the challenges that General Electric has faced as well as look at what I think is going to happen next for the company (note: I am not a regulated financial advisor – please do your own research and understand that this is an opinion piece, NOT a buy or sell recommendation).
The beginning of the end?
Over ten years ago, GE Capital was one of the main growth drivers for General Electric, providing easy access to credit for customers that bought GE products. Unfortunately, during the financial crisis of 2008, the division took an enormous $6bn write-down and faces further charges and penalties from allegedly miss-selling mortgage products in the run-up to the crisis. To make matters worse for shareholders, the charges aren’t levied against activities originally undertaken by GE Capital at all, but against one of its acquired companies – WMC. Way to buy an expensive liability guys…
General Electric is also in an enormous scramble to pay down its debt, offloading assets including a $1.5bn portfolio of healthcare leases and selling its $4bn stake in Baker Hughes (an oil-related acquisition). Why the sudden ‘scramble’ you ask? Well, with declining revenues, a bigger percentage of cash is being diverted away from operations and investment and into debt, slowly choking the life out of the company.
This hoovering up of cash is being exacerbated by the fact that General Electric has lost access to the commercial paper markets, the exchange for short-term, unsecured financing that many corporations rely upon to finance operations. Commercial paper instruments are typically issued for months rather than years and offer extremely competitive interest rates, the flipside being that they are also only available to companies with strong balance sheets. General Electric, with its $100bn+ debt mountain and declining revenues became ineligible to access the exchange forcing them to rely on more expensive sources of debt and compounding their cash flow issues.
GE Power, the group’s power generation and water technology division is also facing challenges. The SEC and Justice Department have begun an investigation into General Electric’s accounting practices following a $22bn write-down in GE Power which has seen catastrophic revenue collapses, failing to turn a profit and draining further revenue from the other business units in the Group. GE Power, which acquired Alstom Energy in 2015 for $9.5bn, has had an on-going string of issues which are arguably due to the collapse in demand for oil and gas and a general market move towards renewable energy.
In addition to a debt laden balance sheet, General Electric has a weak income statement. In 2005 the company declared revenue of little over $136m, which slid to $113m by 2013 and which is still to return to the levels seen more than 10 years ago. The company is also losing cash at a pretty rapid rate with their cash balance dropping from nearly $90bn in 2013 to just $43bn in 2017 and their bad debt ballooning from less than $500m to $1bn over the same period, pointing to a company spending too much and struggling to get paid.
In an attempt to mitigate some of these challenges, GE CEO, Larry Culp, has slashed the company’s dividend to just a single cent per quarter but this has angered retail investors, many of whom held GE as a ‘dividend aristocrat’ (a company that rarely cuts it’s dividend – this cut marks only the second time since WW2). Fed up with a tanking share price and with little reason to continue holding, many have piled out of the company, depressing the share price and damaging the company’s image as an American giant of commerce.
Fundamentally, the company has two options – decrease costs or increase revenues. The desperate selling-off of company assets will raise cash to pay down the debt, but will also decrease revenues. Unless the cost of servicing that debt is greater than the revenue generated by the business sold, General Electric will actually be in a worse place by selling it off as it will have destroyed revenue generating capacity and will have less cash flow to service remaining debt.
This isn’t to say that paying down the debt is a bad thing – it absolutely must be a priority in order to reduce the amount of cash being sucked up paying for a non-productive liability and secondly to improve the balance sheet and regain access to the commercial paper markets.
Whether this is possible remains to be seen. Larry Culp has an astounding track record at his previous company where he quadrupled revenues by driving efficiency and productivity. That kind of cash boost could be exactly what GE needs right now – IF – that cash isn’t immediately swallowed up by higher costs and inefficient expenditure.
In theory it all sounds so simple but General Electric has chewed through two prior CEOs – Jeffrey Immelt and John Flannery, neither of whom managed to make a dent in the problems facing the company. Recent articles report that the company’s bonds are facing classification as ‘junk status’ which will further increase the cost to GE of servicing its debt. A higher cost of debt is absolutely the last thing GE needs right now.
In addition to this, there is significant uncertainty around forecast revenues at GE Power and GE Capital looks to have a $20bn capital shortfall by 2020. Where is this money going to come from?
Personally, I think the company is going to be broken up and sold off in pieces. I simply don’t see any other way for it to survive – terminally declining revenues and growing expenditures with a shrinking pool of assets to support them. This isn’t something I want to see – far from it – but how on earth is anyone expecting this company to pull through?