lunes, 5 de febrero de 2018

lunes, febrero 05, 2018

GE Looks Ugly in Its Underwear

GE’s new transparency is welcome, but a focus on cash shows the company is probably no bargain even after its swoon

By Spencer Jakab

Investors, who have grown numb to bad news at GE, actually celebrated the company’s weak earnings on Wednesday. Photo: Thibault Camus/Associated Press 


Sunlight may be the best disinfectant, but General Electric is learning that it can leave some nasty burns—particularly for those who have spent too much time in the shade.

Investors, who have grown numb to bad news at GE, actually celebrated the company’s weak earnings on Wednesday and only sold off shares after the disclosure of a Securities and Exchange Commission probe into GE’s accounting. What has become increasingly clear as the bad news mounts at GE is that the company’s business is pretty weak.

The SEC review concerns not only the recent bombshell about the company’s $7.5 billion charge for a legacy insurance business but also revenue recognition in its industrial business.

That latter item, including so-called contract assets, may lead to restatements of past financials.

While GE is a serial tweaker of financial disclosure, the company is doing the right thing by shifting its focus to more transparent free cash flow. Unfortunately, it paints an unflattering picture. Even after its shares fell 44% in the past year, and even using 2016 financial figures, before the recent collapse in earnings in its power unit, a comparison with industrial competitors hardly suggests a screaming bargain. GE’s ratio of enterprise value to free cash flow is 31% dearer than the median of eight peers. And, even as GE posted its best return on invested capital in a decade that year, it was the second-weakest of that group in 2016. Today’s numbers, of course, look worse, and there doesn’t appear to be anything in the near future to turn things around.

GE ended the year with net cash of a little more than $11 billion in its industrial units. Cutting its dividend in half will preserve a little more than $4 billion this year, but suspending dividends from its GE Capital unit for the foreseeable future as it plugs its insurance hole will offset those savings. And while GE sees net cash climbing to about $15 billion by the end of 2018, that includes an anticipated $4 billion to $5 billion in proceeds from disposals. In other words, the actual business of selling and servicing stuff probably won’t generate any net cash this year.

In addition to the uncertainty about how much contract assets flattered past earnings, even cash flow may have been boosted. GE Capital often buys receivables from its industrial units so cash is received more promptly. As the finance business conserves cash to make statutory insurance contributions, that could create a short-term hiccup. GE Capital also may be less willing to underwrite riskier deals for industrial equipment, sapping revenue.

It says something about GE that horrific earnings and an SEC probe knocked only 3% off the share price. Wednesday’s news could have been worse. It also speaks volumes that bargain hunters have avoided this wounded blue chip. There clearly was a lot less there than met the eye.

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