GE’s Earnings Remain Opaque
I find it very difficult to understand GE’s operations or to predict future revenue and earnings growth. In the past I have tried to narrow revenue and earnings to GE’s core Industrial businesses. Within Industrial I attempted to ring-fence the poor performing segments like Oil & Gas and Transportation, and explain their impact on GE’s other operations. GE recently merged Oil & Gas with the former Baker Hughes; it could take several quarters before noise related to merger integration costs subside.
Management later suggested Aviation, Healthcare and Power Systems were “core” businesses. It implied that “non-core” businesses like Baker Hughes, A GE Company (BHGE) could potentially be divested. Last week management suggested it would not divest its stake in BHGE, which could be interpreted that the business is now considered “core.” Market chatter suggests GE is now considering divesting its industrial gas engine business, which part of Power Systems. If Power Systems is “core” and part of GE’s DNA then why sell a piece of it?
In deciding what is core and non-core, management seems to be grasping at straws. Layer in changes in revenue recognition for long-term service contracts and the potential for more changes and GE’s earnings become more of a black box. It could behoove investors to wait on the sidelines for a few quarters while management continues to figure things out.
When Will The Next Shoe To Drop?
During Q3 earnings the new management team vowed to simplify GE’s earnings and win back investors’ trust. Since, GE has continued to report bad news. The question remains, “When will the next shoe drop?” Reuters suggests the Department of Justice (“DOJ”) could bring allegations that a GE Capital unit violated laws in connection with subprime mortgages. GE has tens of billions in cash on hand to cover potential DOJ fines. However, the company has a pension shortfall of over $25 billion. If or when GE decides to fill this capital hole might require the company to seek a capital raise. In my opinion, potential capital needed to fund its pension obligations or defend itself against a ratings downgrade and higher borrowing costs could be the next shoe to drop.
Conclusion
There will likely be another shoe to drop at GE. GE remains a sell until it can make its operations more understandable and solve its capital problems.
