General Electric - 3Q Industrial Results; Dousing the Flames ?

General Electric released their 3Q results a few days ago.   This article will address only the Industrial side of GE. GE capital will be examined in an another article.  Gudovac described the pleasures of hearing GE managers present their results back in July. It is worth quoting Gudovac's thoughts from that article: 

"Gudovac always gets a pleasure from hearing polished Managers presenting quarterly results. These presentations can lull even the most jaded owner into a benign torpor. That Middle American quiet confidence. The array of perfectedly composed charts. The team spirit. The situation at the enterprise in question is always the very model of a modern major general corporation. GE's managers are the unquestioned masters of this craft.

Therefore, one should treat any GE presentation as one would a lush summer pitcher of Gimlets - Enjoyable for certain, but don't even think of driving until the next morning."

Segment Profit and Revenues:

The segment profit and revenue information illustrates the situation at GE.  The most profitable business - NBC with a 17.9% segment margin is being disposed. Gudovac discussed the ramifications of  the disposal of NBC some weeks ago. The 2 remaining Industrial Businesses: Energy Infrastructure with segment margins of 17.7% Technology Infrastructure  at 17.1% are experiencing difficult bookings. 

Gudovac also notes that both Energy and Technology should have higher margins given that an increasing percentage of their revenues derive from high-margin service business.  Owners can reasonably expect further downward pressure on margins in Energy and Technology .

Backlog and Bookings:

The headline of Management's backlog slide suggests the backlog is growing.  Strictly speaking the backlog has grown. The news that CSA backlog is up 3% qtr to qtr to a record $127 billion is welcome. CSA tends to have higher margins than New Equipment. Owners need to be careful about the large increase in CSA backlog. Some Services orders represent multi-year contracts. GE managers are well known for their pushing the limits of conservative accounting practices in recognizing revenue and profit. Gudovac suspects that the CSA backlog is filled with multi-year agreements fully recognized when booked. 

The bad news about the Order Book remains new equipment which is down 8% since year end. New equipment orders have dropped 36% from their peak. Finally, the Book-to-Bill ratio remains under 1.0. Owners can expect top line revenues to continue to shrink over the next few quarters. 

Cash Flow:

'Organic' Cash Flow at GE remains healthy at $11 Billion for the last 9 months.  ( for Managment's definition of Industrial COFA see page 9 of 8-K) Subtract 'normal' CAPEX of approx. $9 billion and ones arrives at a Free Cash Flow of $2 Billion for 9 months.  This works out to approx. $2.7 annualized FCF for the industrial side of the enterprise - call it $3 billion.

Whither GE Capital ? 

Gudovac believes that GE Capital is not going to be cash flow positive anytime soon. Owners can sensibly discount to zero any GEC cash flows for the moment.  GEC is more than likely going to consume cash over the next 36 months. Gudovac estimated, as of last quarter, that GEC would requires  $15 billion of  reserves to cover losses.  $7.3 has been reserved as of 30.September. $8 Billion remains to be reserved to cover loan loses for GE Capital.  Gudovac will examine this GE Capital is a follow up article. Management is "selling" its NBC stake which will generate much of the necessary $8 Billion needed to cover additional loan loses. Therefore, Owners can ignore (to some extent) GEC for the purpose of determining what price to buy. 

Let's give management a free ride on GEC and consider it 'cash flow neutral'

Price to Buy ?

What is a sensible price to buy common shares in a Enterprise that currently generates about $3 Billion of annual Free Cash Flow with more than $500 Billion in Debt ? 

Gudovac thinks about $6 a share. 

True, its pulling a number more or less out of the air - but $3 billion of Cash Flow isn't a heck of a lot to support debt service on $500 billion. 

and  GE does pay a 40 cent dividend...paying six bucks means a 6 2/3% yield.

That seems to be just about right.

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