Is General Electric the Company for Very Long Positions?

The truth is that is a really tricky question. Why is that? First of all GE is one of the largest companies in the world, and to foresee its direction with precision is slightly impossible (to use kind words). It is such a big company, that probably not even their own directors have an exact idea of where it is going to head for the next 6-12 months…
Yet, the analysts remain convinced that the current share price ($16.1/share) might go even upper in the incoming weeks. Some analysts mention $17 share, others even recommend entering long positions with GE since a recovery will come sometimes for GE.
The analysts point at its strong rating (AAA-), at its strong profit margin (9.54%) and its strong ROE (16.4%) for 2008. Impressive indeed. What those analysts ignore that those financial parameters went down substantially in 2009 and that no one knows when and how much will they turn around. It might seem logical, but my opinion is that most of the analysts are ignoring the simple truth that a crisis recovery takes 1.5 to 2 times longer than the plunge. And we have just seen the first signs of the recovery, but…
A second reason for the forecasting of the GE’s results comes from its conglomerate structure. GE is so big, that the Enron organizational scheme pictured on the walls might seem small in comparison. (This is NOT to say that GE is doing something similar to Enron, of course). A conglomerate is always kind of opaque and the exhibited results are actually averages – its overall P&L statement actually hides several hundreds of smaller statements, very different. They might be experiencing losses on one side of the business and gains in other regions of the empire… I think important in this case is how will they pursue the strategy of improving their existing businesses beyond the average performance of the markets they are in. Which seems quite difficult to me these days…
David C. Hartzell is the owner and portfolio manager of Buffalo, NY based Cornell Capital Management, says in a recent article that Wall Street has discounted in the late years the ability of GE to make profits. Well, this is right, of course, since GE is still perceived as a diversified industrial conglomerate and it should be perceived as such. What David is (maybe) missing is the fact that if Wall Street has discounted General Electric as a whole, it has also discounted GE on its parts. It is true that GE Financial Services is doing great and that their profits are very big. But it is also true that the merger with the NBC is viewed as not so fortunate by the inside and outside sources and that NBC is now producing huge losses financed by the classing industrial divisions of GE. If you look on the internet at the GE’s employees’ opinions, you will find out that there is a culture clash and that most of these employees resent this cross financing of the media and industrial businesses.
I will not enter here in the BCG portfolio (or even better – into the GE’s directional policy matrix) debates, since it is an investing discussion. My point is that looking at GE as to a single unitary company will hardly give you an exact impression of where GE will go from now on. In other words, it is very difficult to forecast where this business will go in the next months, so my advice would be – be prudent. And do not forget about fundamental analysis too…

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    One comment

    1. Dave Hartzell says:

      Raduh,
      “But it is also true that the merger with the NBC is viewed as not so fortunate by the inside and outside sources and that NBC is now producing huge losses financed by the classing industrial divisions of GE”
      NBC has been consistently profitable.In 2008 it earned $16,969 in revenue, up 10% from 2007.It had a net profit of $3.131 in 2008, and accounted for 9% of GE’s total revenue at a margin rate of 18.5%.These numbers come from GE’s 2008 Annual Report to Shareholders.
      You may be right about the disgruntled employees…it is quite possible that NBC will flourish under the control of Comcast.

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