Financial markets continue to melt up, regardless of the dire state of the U.S. economy. Fundamental analysis for stocks seemingly does not matter amid tax cuts and low interest rates. Price discovery for stocks like General Electric (GE) could be delayed for a while. The company has also been hiving off assets, which makes it difficult to ascertain its core earnings. Asset sales may not be able to mask the diminution of Power Systems, which was supposed to be a key growth engine. Moody’s recently acknowledged that GE Power remains weak:
Moody’s, for its part, noted the sale of GE’s biopharma business to Danaher (NYSE:DHR) improves corporate liquidity, but performance at GE Power remains weak. None of that, however, qualifies as news for equity investors today.
The sale of GE Biopharma to Danaher a few months ago was eye-popping due to its sheer size. The $21 billion sale at 17x EBITDA will allow the company to pare debt and change the narrative away from its dismal financial results. In March 2019, just a month after the deal was announced, management divulged that industrial free cash flow (“FCF”) for full-year 2019 could be anywhere from $0 to -$2 billion. Despite the sale, I believe GE remains highly-indebted.
GE’s Credit Metrics After The Biopharma Sale
GE’s core operations – Power, Aviation and Renewable Energy (“NewCo”) – remain in the doldrums. NewCo’s Q1 revenue of $15.2 billion was down 5% Y/Y. Aviation (up 12%) was the only segment that experienced revenue growth. Read more: