Saying that shares of one-time market bellwether General Electric (GE) have fallen upon hard times lately is surely an understatement. To see a member of the 30-component Dow Jones Industrial Average get cut in half in a year hardly ever happens, but that is exactly what has happened after the company fired its CEO, cut its dividend by half and projected that their long-time goal of earning $2 per share in 2018 was out of reach (profits this year will likely be around half that level):
The big question now is whether GE is a screaming buy and a contrarian value investor’s dream. Normally it would not be overly difficult to answer this question, but the company’s financial services unit shares little information with investors, making it essentially a black box. Aggressive accounting metrics, having been carried over all the way back from the Jack Welch era, make it hard for investors to feel comfortable with the business outlook, as reported “earnings” more often than not differ wildly from actual GAAP cash flow.
That said, at $14 per share (and a dividend yield above 3% after the recent cut) the stock could very well be forming a bottom. Two announcements could very bring out nearly most every possible remaining seller; removal from the Dow and an equity raise to sure up their balance sheet.
The former seems like a forgone conclusion, though the timing is unknowable. As a price-weighted index, GE already represents the small of the 30 components by far. The next lowest priced stock in the Dow is Pfizer, which fetches more than double GE’s share price. Other components such as Boeing, Goldman Sachs, and 3M are anywhere from 15 times to 24 times more heavily weighted in the index even when GE’s market value is roughly the same as 3M and higher than Goldman. It is hard to imagine GE staying in the Dow for another 12 months, and when a change is made, plenty of index fund selling will occur.
Although less certain, there is a decent chance GE seeks to shore up its balance sheet by issuing more common shares in order to reduce debt. Dilutive transactions like that typically are priced below the market price of the stock at the time, and folks like Warren Buffett would likely be interested in scooping up some GE stock 5-10% below market prices. Such a move could also signal to the market that most of the bad news that could occur is behind the company.
Of course, the stock may very well be low enough that even these announcements would barely move the stock down at all, but that too would indicate that the selling has mostly passed.
All of that said, I have yet to start buying GE shares aggressively, mainly because I cannot yet get comfortable with the accounting games they play. The company has said that 2018 earnings should be the trough and that roughly $1 of earnings per share is a very conservative forecast for the year. If I felt strongly that $1 was “trough earnings” I would have little problem paying 14-15x given how many headwinds the company is facing right now. But the big question is what $1 of earnings really means to GE management.
As the company seeks to shore up its balance sheet and sell off some smaller divisions, we may get more clarity about their financial condition. Getting booted from the Dow would unleash some of the last remaining sellers (passive index funds) and raising equity could be the first step in stabilizing the capital surprises. While GE is not the ideal contrarian investment, the situation is worth watching closely as sentiment has turned severely negative and a few last shows could be getting ready to drop soon.