Amid all the records and ear record trading activity on Wall Street, we are witnessing a bigger story – the slow collapse of America’s biggest manufacturer, the once mighty General Electric.
It’s not going broke, but its shares have lost around $US90 billion of value – or nearly 30% so far this year as investors recognise that the company that once drove US manufacturing and corporate belief is a fading shadow of itself.
GE is an industrial conglomerate – it has operations from jet engines, to wind turbines, power stations and turbines, railway equipment, medical equipment (especially imaging), oil and gas services and lighting. And that is proving to be too complex for its board and management.
It is now without most of its once huge financial services business which almost sent the company broke in the GFC and why Warren Buffett rode to the rescue and in 2008 at the height of the GFC (less than a month after Lehman Brothers collapsed) injected $US3 billion into the company which reassured the market that he stood behind the faltering giant.
Notably Buffett sold the last $US300 million or so of his original $US3 billion worth of GE shares earlier this year. The rest were sold in 2012 (at prices below what they are now).
But ironically he did spend $US520 million buying a stake in the old GE credit card business now called Synchrony. 2017 has also seen Buffett slash the size of his huge holding in another old line US business icon, IBM.
After a 6% slump on Monday, GE shares are at four and a half year lows – down nearly 30% so far this year while the Dow is up nearly 18%.
Close to $US90 billion has been carved off the company’s market cap ($US193.2 billion on Monday at the close). That’s despite close to 30 records this year for the Dow on its run over the 23,000 level.
Monday’s sell-off sent company’s shares to their lowest close since May 2013, and the 6.8% slump was biggest one-day percentage decline since August 2011.
More than 161 million shares changed hands, nearly triple the full-day average, and enough to make the stock the most actively traded on major US exchanges, according to FactSet, the uS financial data service.
The stock’s weakness follows an odd session on Friday, when GE reported its first earnings miss (of market forecasts) in two and a half years, and more importantly slashed its earnings guidance. That saw the shares tumble 6.3% in early trading, then rebound to close up 1.1%.
But with several leading analysts cutting target prices and recommendations over the weekend, the sellers were out in force on Monday and didn’t miss the stock.
Central to the minds of analysts and investors is whether GE can hold its dividend or whether a cut will be a big part of its investor day announcement on November 13.
GE currently ays an annual dividend of 96 cents a share and (a bit like Telstra in Australia), the company seems posed to cut that to allow it to finance a big restructuring with a reported $US20 billion in assets potentially on the chopping block.
Analysts think the dividend could be cut to around 70 cents a share. At 96 cents a share GE shares are on a dividend yield of 4.32% (no favourable help from imputation in America!).
A cut to 70 cents would drop the yield to around 3.15% (at current Monday closing prices). That would still see the yield well above the average yield across the Dow average of 2.20%.
In Friday’s quarterly announcement GE sliced its 2017 projections and new CEO John Flannery revealed he wants to sell more than $IS20 billion of the company’s assets. details of those saes ideas will come at the November 13 meeting of investors.
"Our results are unacceptable to say the least," Mr. Flannery said on a conference call Friday, noting that his review of the company is exhaustive and everything is on the table. "Things will not stay the same at GE."
Mr. Flannery, who was became CEO in August and recently became chairman with the early exit of long time incumbent, Jeff Immelt, cut GE’s earnings targets by a third, and halved its 2017 cash flow from a July estimate (indicating that the company hit the wall in the third quarter and doesn’t expect any improvement any time soon).
Cash flow from operating activities is now projected to be about $US7 billion, a near halving from the previous view of $US12 billion to $US14 billion, with a big part of the drop coming from the power division, which primarily makes turbines for gas and coal-fire power plants.
GE claims it is ahead of its goal to cut $US1 billion in industrial costs this year, cutting $US500 million in the third quarter and hitting $US1.2 billion for the year so far. Earlier this year, GE set a goal to cut $US1 billion in such costs this year and next, but that hasn’t been enough to placate analysts.
"We need to make some major changes," Mr. Flannery said on the conference call. And that is certainly what the market is looking for next month.
GE’s third-quarter earnings fell as it incurred hefty restructuring charges. it still reported a profit of $US1.8 billion, down from $US2 billion a year earlier. Revenue jumped 14% to $US33.5 billion in its third quarter, up from $US29.3 billion a year earlier, boosted by a merger of GE’s oil-and-gas unit with Baker Hughes.
Oil-and-gas revenue rose 81% from a year ago driven by Baker Hughes; without these new assets, revenue fell 7%. Revenue growth was mixed with aviation and health care businesses expanding, but power, lighting and transportation all shrinking. Transportation revenues dropped 14%.
Marketwatch.com said Analyst Nigel Coe at Morgan Stanley said it is “false” logic to believe that things can’t still get worse for GE.
He downgraded GE to underweight, after being no worse than equal weight for at least the past three years, and cut his stock price target to $US22 from $US25. Coe is now the third of the 20 analysts surveyed by FactSet to rate GE the equivalent of sell.
UBS analyst Christopher Belfiore cut his rating for GE to neutral, after being bullish with a buy call since January 2015. He also slashed his stock price target to $US24 from $US31. Belfiore also cut his estimates for 2017-to-2019 earnings by 34%, and his dividend expectation by 30%, which would put it at 67.2 cents a share.