The Bloodbath Begins At GE

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President Barack Obama and Geoffrey Immelt observe where the government's $140B bailout money went

The bad news continues to pour in for General Electric (GE). Last week the company announced it would lay off 12,000 employees from Power Systems as part of an effort to achieve $3.5 billion in cost outs by the end of next year:

The company blamed the layoffs, which represent about 4% of its total workforce, on a weak global power market, including the gas and coal industries. The company had about 295,000 employees as of December 2016, according to its corporate website.

GE Power makes products like gas power systems and and steam turbines and sells them to utilities and industries.

“This decision was painful but necessary for GE Power to respond to the disruption in the power market, which is driving significantly lower volumes in products and services,” GE Power CEO Russell Stokes said in a statement. “Power will remain a work in progress in 2018. We expect market challenges to continue, but this plan will position us for 2019 and beyond.”

Management was keen to point out that the lion’s share of the headcount reductions would come from Europe. Such large cost outs at Power Systems could imply its $10 billion acquisition of Alstom’s (ALSM) gigPower division two years ago has not lived up to expectations. The deal was expected to create a $50 billion turbine-services backlog and about $3 billion in cost synergies. In Q3 management was caught unaware by a shift in demand for heavy duty gas turbines from 46 gigawatt to 40 gigawatt. Services revenue was dismal and is expected to fall sharply going forward.

Lower Revenue And Lower Margins For Energy

There is excess capacity within Power Systems, which underscores the poor timing of the Alstom deal. Demand has slowed for traditional power plants that burn coal, natural gas or petroleum to produce electricity. Business has shifted to alternative energy sources such as wind and solar systems, and I do not expect the trend to end anytime soon. Revenue from Power Systems fell 4% Y/Y in Q3, while Renewable Energy revenue was up 5%. Regardless of cost take outs Power might not see the 14% segment profit margins it generated in Q3 2016.

As Renewable Energy cannibalizes more sales it portends GE will gain exposure to the segment’s paltry segment profit margins of 9%. I foresee declining flat to declining revenue for GE’s overall energy businesses at lower margins. This does not bode well since Power Systems was expected to be an anchor for the company.

“Change” Is The Only Constant At GE

During its Investor Update in November GE announced it was halving its annual dividend from $0.96 per share ($8.4 billion) to $0.48. Last week it declared a $0.12 quarterly dividend payable in January 2018. Its dividend reflects the company’s desire to better manage its cash flows. In the past dividend pay outs exceeded GE’s free cash flow, which I found rather alarming. I believe the dividend cut was prudent amid declining free cash flow and a recent ratings downgrade by Fitch. Cash flows are highly dependent upon dividend upstreams from GE Capital – another non-core segment that is difficult for investors to get their arms around. Dividends from GE Capital have been halted while the unit continues to evaluate its insurance reserves. The company might have to slice its dividend even further in order to protect its credit rating.

The one constant at GE appears to be change. The metrics management wants investors to focus on to help understand the business constantly changes. “Core” versus non-core operations are now Power, Healthcare and Aviation, but that could change later. Maybe Oil & Gas or Transportation could considered core next year. GE’s core earnings and cash flow remain opaque to me. I would recommend that investors wait on the sidelines until management can deliver consistent top line growth, stable cash flows and achieve its cost out goals.

Conclusion

The bloodbath has begun at GE. There could be more pain ahead until it finally rightsizes its energy segment(s). GE remains a sell despite hovering near its 52-week low.

On Trump And The Global Economy

Wuyi, Coconut Rob, Shock Exchange, Professor Brogman stunt for the ‘gram

The second installment of Trump And The Global Economy Town Hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Wuyi Jacobs (AfroBeats Radio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead.

The event was well-received by the community. We parsed through President Trump’s proposed tax plan and [i] how it was pure economic folly and [ii] high net worth individuals could potentially game the system by shifting income around. Apparently, Kansas Coach Bill Self did this when the state of Kansas cut taxes in the past. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership vis-a-vis Obama? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?

 

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