General Electrics (GE) shares have been extremely volatile over the past three years, and nothing has changed during the first three months of 2019. GE's shares have surpassed S & P 500 (SPY) so far in 2019 (18% 16%), but the share price of the industrial conglomerate is still considerably lower than it was a year ago.
Investors were extremely bullish after the management spoke up the company's outlook in early 2019 (notice the steep rise in January), but the bear quickly took control, with the most notable example. that JPMorgan's Stephen Tusa recently lowered its 12 month price target to $ 5.00 (from $ 6.00). Simply put, the feeling was improved to, of course, Mr. Tusa counted on parade.
Nearby stock pressure is a difficult pill to swallow, but in my opinion, investors with a long term mindset will be rewarded when Mr. Larry Culp, CEO and team can finally turn the ship. But it is important to note that the swing is actually already underway.
"Turn" is already underway
I have long believed that GE's turnaround story would take years instead of months to play out, and I still believe this to be the case today. But Mr. Culp has made some significant changes since he took over for Mr. John Flannery at the end of 2018, and in my opinion, the company's current business prospects have improved significantly over the last six months.
So you can rest assured that the business prospects actually change / improve this stodgy, complex conglomerate. Some examples:
Management has been busy restructuring GE's business profile, and in my opinion, investors should expect this rapid pace to continue through 2020. Consider this list of transactions / agreements: [ In February 2019, GE concluded its uniquely structured deal to merge its oil and gas assets with Wabtec (WAB). In addition, the company announced an agreement to sell its biopharma business to Danaher (DHR) for $ 21.4B.
And consider this; the above list does not include all of the restructuring work that was announced during the first four months of 2019. Furthermore, one of the transactions / agreements alone is not enough to move the needle (but some could argue that biopharma- the deal is a needle model), but in my opinion this list is important if you consider all the moving pieces. GE today already looks very different than it did a few months ago, which is good.
In addition, there are already rumors that GE will sell parts of its power business, rumors that I think will come to fruition, so investors should expect more from the same in 2019/2020. In addition, let's not forget that management has already announced its intention to sell Wabtec and the Baker Hughes (BHGE) games in the future.
Legal / Limitations of Liability
The company carried out a deep dive in the insurance business and announced that the long-term care reserves are sufficient. Insurance reserves have been a major jab for many bears since GE previously announced planning their reserves at nearly $ 15B. While nothing is etched in stone yet, I am encouraged to remove some uncertainty by announcing the adequacy of the reserves. In addition, it seems that the management is finally proactive when it comes to long-term care activities that should be good from a risk management perspective.
In addition, a UBS analyst recently released an investor note that described GE's retirement situation as not as bad as some might think. Of course, this comes after the company has already committed to further pension contributions over the next few years, but I agree with the analyst that GE's "situation situation" is not as bad as anyone would have you believe.
And more recently, GE agreed to pay $ 1.5B to settle the long-term receivables associated with subprime mortgage counterfeiting in the financial crisis. The management used this settlement as "another step in our ongoing commitment to risking GE Capital". I tend to agree with the management, and in my mind there have been many steps already taken since Mr. Culp took over.
Put everything together
How should shareholders view all these changes? For me, the advertised / closed transactions show that management is finally serious about changing the direction of this large industrial conglomerate (and yes, "industry" is finally an appropriate identifier for this company). Furthermore, this article does not mention that GE's board looks very different from what it did at the end of fiscal 2017. For example, seven of the 10 GE directors nominated this year are new to GE over the past two years and two long-term directors. (Jim Mulva and Geoff Beattie) are about to retire in 2019. This is exciting news because the board failed in the shareholders in a big way over the past five plus years.  GE's turn will definitely take time, but if you ask me, the turn is already in place. Mr. Culp has undoubtedly still some work to do, but I believe that the company's current condition is significantly better than it was at this time of the year before. When considering GE's current valuation, the shares trade at a deep discount compared to their equality group, and rightly so.
is the price of the stock? That's a great question. I think there will be more negative developments over the next few quarters, so a better entry point is likely to present itself. But in my opinion the warehouse looks attractive, the longer you look. To this point, Julian Mitchell of Barclays has recently repeated his Overweight rating and $ 13 pricing target based on the future of GE (2021 in this case).
Lower risk: (1) The Company has significant additional fines related to the DOJ / SEC surveys, (2) The power takes longer than 18-24 months to recover and burn through cash, (3 ) the management has fire sales and disposes of assets on the bedrock prices, (4) the company's credit rating hits junk mail, and (5) additional insurance reserve fees are booked.
Upward Risks: (1) Spins (Transport, Health and Baker Hughes) provide more capital than expected, (2) the pension deficit shrinks as a result of the positive swing winds, (3) well-known investors make money to work in GE, which leads to a positive change in emotions (eg Mr. Warren Buffett), and) Mr. Culp continues to win over the market.
Opportunity cos t absolutely must be considered when considering GE as a potential investment, but if you are not a "professional" who needs to face (or beat) quarterly references, you can invest in these types of turnaround stories, and harvest big, big wins if you are willing to underperform the market for a period. I cannot say for sure that GE's stock will surpass the market over the next 12-18 months (I would be naive to believe there was some security in the market), but I think stocks are Valuable if you are willing (and able to) hold on to the stake for the next five years.
Yes, the swing is already in place, but GE is still a 3 to 5 year history. However, I think this industrial conglomerate is a big, long-term investment, if it meets your risk / return profile.
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Enlightenment: I am / we are long GE, BHGE. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.
Additional Information: This article is not a recommendation to buy or sell any of the aforementioned shares. These are just my personal opinions. Each investor must make his own due diligence before making any investment decision.