General Electric Company (NYSE: GE) has an incredible history behind it, and remains a major and important industrial company. But it's not the same company as it was thirty years ago. In fact, since the deep 2007-to-2009 recession, GE has been a company struggling to find its way. While it is highly likely to survive and thrive again, investors offer great potential for the material and investors need to understand what they are buying when investing in GE today. Here are some important facts you need to know.
1. It's a turnaround story
The General Electric stock is down nearly 70% from its 201
However, you cannot lose the big picture here. General Electric is trying to turn its business around. It is likely to succeed, but there is a risk that it will not. Or that it will take longer, maybe much longer, than investors expect. Progress along the way is unlikely to be steady, with ups and downs driven by news, economic fluctuations, Wall Street's inevitable gyrations and good and bad financial results. This stock will rise and fall accordingly, often dramatically.
Investing in a turnaround story is not appropriate for conservative investors. Even investors who are willing to take on moderate amounts of risk should probably think twice before buying into a turnaround game. It can be difficult to stick through the whole process and sometimes turnarounds do not work. GE, as a turnaround, has both great recovery potential and great risks.
2. This will not be speedy
In the fourth quarter of 2018 conference call, CEO Lawrence Culp said, "As my friend Jim Collins of" Good-to-Great "fame can say, it's a start, but we have a lot more work to do. "He describes GE's progress in turning his business and the statement was part of his prepared remarks, not an off-the-cuff comment.
Finally Culp was just realistic and looked at the facts that they exist. Investors need to listen and take the queue. It would be great if GE's business problems could be cured overnight, but it's just not possible. Real estate insurance that is committed to raising money takes time to work through. Debt reduction is great, but they're just stuck in the foundation, they won't cure the business of their bigger problems. And some of the company's main divisions, especially the power business, face significant cyclical headwinds that need to be implemented, and GE has no control over the timing of an industrial boom.
This is not the beginning of the trip, itself, but the trip is nowhere near.
3. You should continue to worry about the black box
The next big thing to remember with GE is that it was the company's finance department (GE capital) that led to all this problem. Under Jack Welch, GE capital deviated significantly from its basic purpose of financing GE customers so that they could buy the company's products. Banking-rooms went away to such an extent that during the 2007-to-2009 recession it had to take a state rescue. This move was basically a way to reassure Wall Street's concerns about liquidity at a time when liquidity was tight through the financial markets.
The company quickly created a plan to reduce financial exposure after the financial crisis. It was and still is the right move. But as you expect, the best pieces were the easiest to get rid of. That helps to explain why the financial boom has repeatedly been a financial drainage in the decade since the recession ended. That the wastewater will include an additional $ 4 billion capital injection in 2019. And while the company continues to pay off debt on the GE capital unit, it does not expect to reach target debt levels by 2020.
In other words, the problem that started all this is still a problem. Worse, as an investor, you have little insight into the problems of the unit, which accounts for a significant portion of GE's approximately $ 95 billion in long-term debt (around 75% of the capital structure, excluding non-controlling interests). It has a more supply-based balance than most of its peers as well. And since the problems in the GE capital appear to appear with painful regularity, it's a huge wild card. You need to be aware of more, potentially unpleasant surprises from GE's finance department.
And if that wasn't enough to worry about, it's worth remembering that GE is also subject to a SEC request for the $ 22 billion written down by the acquisition of Alstom, a French supplier to the power industry. It can also lead to a troublesome outcome. It is also reasonable, based on these two issues, to wonder if there are even more unknown unknown lurks in the company's books. The cockroach theory (if you see a roach, there are several) suggests that more problems can over time over time.
Eyes wide open
None of this is suggesting that you should not buy GE; It has an iconic name, significant and important industrial enterprises, and material recycling potential. A turnaround may require a long and painful revolution that leaves it focused on only the most profitable operation (such as aviation and healthcare), but there are still real growth opportunities hidden in the mess that is GE today. If management can refocus on these, investors will probably be happy with the outcome.
However, this is not a suitable stock for most investors. There are very real risks here and the restructuring process is far from over, a fact that the CEO has tried to explain to Wall Street. GE is only for investors who have higher risk tolerance and are willing to stick to what can be a very long time. If it's you, great. If you get a bit of thinking about ups and downs so far, don't buy the GE turbulence is far from over.