How Far Could $5 Billion Go?
Dow Chemical Co. (NYSE: DOW) probably would have had a much better day if the market did not plunge at the end of the day. In university finance classes they teach you that cutting dividends is a bad move, but that isn’t the case when the yield has gone parabolic and when companies have to go into preservation mode. This is something that we suspect General Electric Co. (NYSE: GE) will follow soon.
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General Electric Co. (NYSE: GE) may have moved more today on a percentage basis than in any single day in many investors’ lifetimes.
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We won’t bother discussing the current market situation as being a very difficult one. But the problem isn’t just the baby being thrown out with the bathwater. Now, investors are throwing out mommy, daddy, and everyone else they know.
General Electric Co. (NYSE: GE) falls in this camp and its credit default swap spreads have been hit along with every other company that is tied to financial companies or that does business with them. GE is one of the few companies left with a solid Triple-A rating, and the company has been very clear about its intent to keep it that way. As these credit spreads have been hitting new historic highs today, we asked our contacts at GE to comment.
General Electric has its upcoming investor ANNUAL OUTLOOK meeting on Tuesday, December 11, 2007, and this will be an event to watch. The meeting will begin at 3:00 PM EST and we’ll get to see some of its forecasting ahead. Last Monday, First Call’s consensus for 2008 was pegged at $2.50. It now appears that First Call has 2008 consensus set at $2.49.
There were some key analyst calls this last week ahead of Tuesday’s event, although these are very short summaries and other reports may have been issued:
The good news is that the bar has been lowered. The bad news is that the negative sentiment has crept into the stock as General Electric won’t be entirely immune from what is almost a certainly weak US consumer in 2008 despite strength in international orders, airline engines, power stations and other areas. GE’s stock chart is also under pressure now that it broke under and was unable to stay above its 200 day moving average ($37.79) for a second time. That adjusting level may act as some larger resistance the second time around. Shares were challenging $42.00 just two-months ago.
We are still impressed that the company thinks of itself as a growth company with plans for 20% return on capital. That isn’t a mandatory target every single quarter nor likely is it a firm commitment every year, but it’s still impressive for a company worth $376 Billion in market cap.
So the bar has now been lowered. We’d also expect more of the same from analysts lowering price targets or earnings per share targets on Monday and Tuesday ahead of the event. They don’t always act in unison, but the pack mentality seems more frequent than coincidental.
Jon C. Ogg
December 9, 2007
Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.
General Electric (NYSE:GE) reported earnings and guidance, all of which looked in-line with expectations. The conglomerate posted $0.50 EPS & $42.5 Billion in revenues, versus $0.50 & $42.42 Billion estimates. It also sees an EPS range next quarter of $0.67 to $0.69 versus $0.68 estimates and sees fiscal 2007 EPS in a range of $2.19 to $2.22 versus a $2.21 estimate. It previously offered $2.18 to $2.23 for Fiscal 2007 before it’s "pretty good economy" presentation.
My partner broke out the numbers and saw that operating income lagged revenues growth. He isn’t all that impressed. Personally, GE’s earnings are almost always a mixed bag. There are so many items in each quarter and always some moving parts that are viewed individually as good or bad. This just depends if you see it half full or half empty. My take is that with everything in-line and the reaction almost always being muted, this quarter was fine. The company repurchased $6.3 Billion in stock for the quarter and will repurchase $5.7 Billion of stock in the fourth quarter. Ths one boils down to interpretation and final opinions. To me this looks fine, but there probably aren’t going to be any vigilant analyst calls either way. This has so many moving parts that it just boils down to opinion.
Other issues ahead of earnings:
Jon C. Ogg
October 12, 2007
The world’s conglomerate leader, General Electric (NYSE:GE), is set to report earnings on Friday morning early ahead of the opening bell. Just recently, the company reaffirmed its guidance for the quarter and for the full year when it was discussing "a pretty good economy."
First Call estimates are now $0.50 EPS and $42.4 Billion in revenues, but this look like it is adjusted downward to account for the plastics unit and for exiting Japanese personal loan operations and for items rather than a mass exodus on earnings. Prior to the changes, the range given was $0.54 to $0.56 EPS on total revenues of approximately $42 Billion, with net earnings of $5.5 to $5.7 Billion. The truth is that in modern history the company is never really that far off and the one-time items are going make this harder to look at for the quarter. It previously offered $2.18 to $2.23 for Fiscal 2007, and we are going to be focused on the guidance more than on the past. We backed out the charges for restructuring and divested operations, but the number here appears to be one-penny lower now after backing out items with the new Fiscal 2007 estimate at $2.20 and revenues of roughly $171.4 Billion.
The stock is within 1% of multi-year highs, but the stock has more or less been trading in a $41 to $42 trading range for most of the last three weeks. Analysts have an average target of $44.00 to $45.00, depending on which targeting sources you use. With the favor going back into mega-cap stocks and with the shares within $2.00 to $3.00 of the targets, it is actually fathomable to see targets raised if the company offers some formal 2008 targets. If that happens a new target range is likely to ratchet up to a $46.00 to $48.00, but understand that is purely for conjecture at this point. We won’t have an exact number until today’s close, but as of mid-morning today it appears as though options traders are only factoring in up to a 1% to 2% price change in either direction.
To make matters more complicated on a longer-term basis, the Financial Times yesterday broke news that GE’s NBC unit "MAY" be up for review for a spin-off. This is noted as being a post-Olympics decision for 2008, and we have noted that an entire spin-off might be better in pieces. This is not a full break-up of the company like we said would be a bad idea on CNBC. We’ll also look to see if the Boeing Dreamliner delay yesterday has any impact on its jet engine business and service contracts like it did on other suppliers. There are other key issues to watch:
If you’d like to see a preview we did ahead of last earnings you can see it here.
Jon C. Ogg
October 11, 2007
General Electric Co. (NYSE:GE) is hitting new recent highs again, although it may be worth noting that these $42.00+ prints are not new highs from 1999 to 2001. Nonetheless, this marks five-year highs in the stock.
There were some concerns on the street up until yesterday that the company might have some weakness in its consumer exposure in appliances and finance, but CFO Keith Sherin addressed analysts yesterday and maintained prior earnings guidance in his "pretty good economy" explanation. That has acted as the catalyst along with a FOMC decision to cut Fed Funds and the Discount rate by 50 basis points.
GE remains one of the few AAA rated debt rating companies out there. Analysts still have an average price target of $44.00. Just this morning, Goldman Sachs noted that the company is well positioned to benefit from leadership in infrastructure, across energy, aviation, transportation, oil & gas, water, and financial services. Goldman Sachs also noted that the exit from Japanese consumer finance is not surprising. Goldman Sachs does note that it expects investors will be challenged to understand all the accounting nuances "impacting an array of offsetting gains and charges across Q3 reported earnings versus continuing operations." Goldman Sachs remains with targets for earnings of $2.21 in 2007 and $2.45 in 2008.
Regardless of outside analyst calls, GE is a company that is just hard not to be impressed with. After a semi-private luncheon with CFO Keith Sherin in July, it was hard to not be impressed with Sherin’s stance that "GE is a growth company" on numerous occasions. I would have classified it as more of a cyclical or income play because of the conglomerate nature. But Sherin stated that the company seeks a 20% return on capital across the spectrum and they review all segments with that target in mind. If that isn’t attainable, then a divestiture of an underperforming operation becomes much more likely. If you look at what the conglomerate is doing in oil and gas now, you’ll think they plan to get quite large there. Anyone hearing the entire presentation from management will dismiss any of those old break-up calls.
Any time these giant stock hit new highs, it is never out of the norm to see some profit taking. With a now $429 Billion market cap, it takes quite a bit of cash inflows to move the stock up. Nonetheless, it would appear that the floor is now much higher than just a month ago. It is also worth noting that stocks that exceed old highs tend to do that for more than just one day.
Jon C. Ogg
September 19, 2007
Jon C. Ogg produces the 24/7 Wall St., LLC Special Situation Investing Newsletter; he does not own securities in the companies he covers.
General Electric (NYSE:GE), at its GE Security Analyst Meeting this morning, has signaled that it is averting an earnings warning. The prior guidance remained. GE showed its Q3 2007 outlook, although it is much the same it gave with its Q2 earnings presentation.
Back then it showed projections of $0.54 to $0.56 EPS on total revenues of approximately $42 Billion, with net earnings of $5.5 to $5.7 Billion. There appears to be no change to its Q3 reported earnings and total year guidance. This new slide shows the same $0.54 to $0.56 EPS guidance, up 15% to 19%. It is also offering $2.18 to $2.23 for Fiscal 2007. We backed out the charges for restructuring and divested operations.
As far as how this compares to estimates, these numbers are mostly in-line. First Call has $0.55 EPS and $42.69 Billion in revenues. As far as total fiscal 2007, First Call lists $2.21 as the EPS target and an implied $171.75 Billion revenues.
This should come as a relief at a time when investors are trimming risk and when companies are facing a rougher time. After speaking with several investors and several counterparts out there, we all had a feeling that maybe GE’s infrastructure business might not be quite to offset some of that weakness tied to housing in its appliances and in financing out there. If the overall economy isn’t going to deteriorate much further, that worry appears to be alleviated.
If GE shares can hold this 1.3% gain at $40.70, this will be within a hair of its $40.82 highest close of the last 52-weeks. The intraday high this year is $40.98. If this tone remains in individual unit presentations, then it would seem likely that analysts will reaffirm or maintain their ratings and that average $44.00 price target.
It seems like the media is touting and flaunting more and more for a return of nuclear energy. This may or may not happen as the applications are again for "Next Year" and it is with no surprise that it’s becoming the topic of much labor in Mexico pronounced "Man-ya-na" (sorry no N~ without changing languages). You can also see where spot Uranium prices have come down significantly from the pre-summer ramp and summer highs. TradeTech’s Uranium site shows its price chart for Uranium and The Ux Consulting Company shows much of the same. But with $80.00 per barrel of oil and T. Boone Pickens calling for even higher oil prices you never know just how long the "call for nuclear power" will take to resurface from the investment community. Nuclear power is getting more media coverage again.
Let’s assume for a moment that we forget about the discussions leading to delays that have been perpetual. Let’s for get about the political side of nuclear power. Lets forget about killing land under mountains where we’ll bury the stuff in Nevada. And let’s forget about the potential environmental catastrophe that can result if something goes horribly wrong.
There are many stock plays in the U.S. alone that will be huge beneficiaries of this if even one nuclear power plant approval goes through. If there is one, why not the full dozen of them. Here is the lot of companies:
Shaw Group (NYSE:SGR) is perhaps the most vertical of the engineering and construction firms. Fluor (NYSE:FLR) is also in there. And we can’t leave out the monster General Electric (NYSE:GE) for new reactors, nuclear fuel, reactor services and performance services.
Cameco (NYSE:CCJ) out of Canada is THE go-to behemoth in the stock market for Uranium miners and producers. The much smaller company in the US is USEC (NYSE:USU), although its shares were hit exceptionally hard Friday after testing started. Some more smaller and much more speculative stocks in the sector are Uranium Resources, Inc. (NASDAQ:URRE), U.S. Energy Corp. (NASDAQ:USEG), Uranerz Energy Corp (AMEX:URZ), and even Canyon Resources Corporation (AMEX:CAU). Mosaic (NYSE:MOS) and CF Industries (NYSE:CF) are stealth plays in the sector that can enrich uranium from phosphate, but you should know that prices have to be very high and have to be expected to remain very high for quite some time for those to be cost effective.
There is one thing companies coming public hate to see, and that is a discounted pricing to their indicated trading range from the original prospectus terms. Genpact Ltd. (NYSE:G) did just that. If you consider that the former General Electric (NYSE:GE) unit priced at $14.00 instead of the $16.00 to $18.00 range and then walked right up the trading staircase after opening from $14.00 (and a tad under) up to $15.00 and then $16.00 and then a close of $16.75, you’ll want to scratch your head. Sure the market closed up again at the end of the day. That is crucial and the IPO market has been weak. But what is obvious is that underwriting departments are probably feeling a little spooked after recent debacles in IPO’s of hedge funds, private equity, and even online travel.
This may actually help some of the IPO’s out there if this stability in the market and a solid IPO close can come. There are some negatives out there as it was pointed out how GE represents almost 75% of Genpact’s business and with GE still owning more than a 20% stake. Most of these ex-Conglomerate subsidiaries tend to do well in the markets, so barring the cautionary stance it seems hard betting against one of the spin-offs with "Gen…" in the name.
GE’s business contract runs to 2013 according to the prospectus. Shares traded over 18 million shares today.
Jon C. Ogg
August 2, 2007
Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.
Genpact Ltd. has priced its IPO under the ticker "G" on the New York Stock Exchange of 35.294 milllion shares at a price of $14.00 per share. Unfortunately, the estimates pricing range was originally set at $16.00 to $18.00. The joint book runners for the offering were Citigroup, Morgan Stanley, and J.P.Morgan. Co-managers are listed as Merrill Lynch, Wachovia, Banc of America, Deutsche Bank, Credit Suisse, and UBS.
This is now a former General Electric (NYSE:GE) GE unit, and it is a Bermuda-based offshore provider of business process outsourcing to General Electric and to many large global companies. GE sold a 60% stake of Genpact back in 2004 to private equity, but it still held a minority stake and is the company’s largest customer with a contract through 2013. Half of the shares are being sold by the company for funding and half of the shares are being sold by holders.
Here is the company’s own basic description of itself, and it sounds more like an outsourcing and cost containment operation that operates within other companies (mostly within GE now). We manage business processes for companies around the world. We combine our process expertise, information technology expertise and analytical capabilities, together with operational insight derived from our experience in diverse industries, to provide a wide range of services using our global delivery platform. Our goal is to help our clients improve the ways in which they do business by continuously improving their business processes, including through the application of Six Sigma and Lean principles and by leveraging technology. We strive to be a seamless extension of our clients’ operations.
Genpact has more than 26,000 employees and operates in 9 countries. Its 2006 revenues were $613 million, and its business outside of GE is currently listed as 25.8%; so GE is almost 75% of its business for now. Immediately following this offering, 206,409,349 common shares and no preference shares will be issued and outstanding. GE is selling 5.88+ milliojn shares in the IPO, and based on the prospectus it appears that GE will continue to own a 22.65% stake in the company after the IPO.
Jon C. Ogg
August 2, 2007
Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.
General Electric’s (NYSE:GE) 10-Q filing included some accounting changes that will have an impact on results from the years 2000 to 2004. Before you have a conglomerate accounting irregularity freak-out session, there are many other things to worry about elsewhere like the weakening stock market because these changes to results are in reality quite small and really do not look company-wide. Sure, this may make cover stories for the weekend versions of the Wall Street Journal and will be in other papers this weekend, but that’s because it is easier to garner more interest if there are concerns and possible scandals to report.
If you follow "Legal Proceedings" then this is not really anything GE investors should worry about. Based upon what I was able to garner from a recent luncheon with GE’s CFO Keith Sherin companies this spread out and anywhere close to this large will have reviews in some form or another in one unit or another for the end of days. That is the price in a post-Enron financial world. If you want a prediction right here and right now you heard it from me: this isn’t the last restatement or accounting change you’ll ever see, and this isn’t likely a systematic problem spread across General Electric. Take a look at some of at the copied verbatim for exact wording out of the 10-Q:
In connection with the SEC’s investigation, the Audit Committee of our Board of Directors, with the assistance of independent counsel, undertook a review of the Rail transactions. Based on this review and as further described below, we have determined that revenues had been inappropriately accelerated so that they were recognized in the fourth quarter of each of the years 2000 through 2003 rather than in the first quarter of the following year. Our management and Audit Committee determined that the effects of the Rail transactions are not material to our financial statements under applicable SEC guidance and accounting literature. If the transactions had been recorded in the appropriate quarters, the effects on GE’s consolidated revenues, earnings before income taxes and accounting changes and net earnings would have been less than 0.2% in each year.
In each of the years, basic and diluted net earnings per share would have been unaffected had these transactions been correctly recorded, except that, because of rounding, (1) 2003 diluted net earnings per share, understated by $.0009, would have increased by $.01, and (2) 2002 basic net earnings per share, overstated by $.0022, would have decreased by $.01. In addition, in fiscal years 2001 through 2004, basic and diluted net earnings per share, as originally reported, would have been unaffected if these transactions had been correctly recorded.
The effects of the Rail transactions on revenues and profit for the segments containing the Rail business, as originally reported, from 2000 through 2004 would have been less than 4.5% in all annual and quarterly periods other than the fourth quarter of 2002 and the first and fourth quarters of 2003. Industrial Products and Systems segment revenues and profit were overstated by 8.8% and 14.5%, respectively, in the fourth quarter of 2002 and understated by 30.0% and 35.4% in the first quarter of 2003; Transportation Systems segment revenues and profit were overstated by 22.6% and 16.6%, respectively, in the fourth quarter of 2003. Transportation Systems was the smallest of GE’s 13 segments in 2003, representing 1.9% of consolidated revenues and 2.3% of consolidated earnings before income taxes and accounting changes.
In the Rail transactions, we transferred locomotive titles but not sufficient substantive risks and rewards of ownership to financial intermediaries. One quarter after title transfer, we delivered those locomotives to the ultimate railroad customers. Our Audit Committee has determined that, in connection with the Rail transactions, several individuals in our Rail business and in our capital markets group engaged in intentional misconduct that misled those responsible for accounting oversight and further that the transactions were also not adequately examined by those responsible for accounting oversight.
Ultimately you will have to decide on your own how material this is. Back in February we noted how the "Material Weakness" section in the Annual Report was not all that material for a company this large and with this many units. If this was very material, then there be changes to internal controls and procedures in the filing and those were deemed effective. I won’t bother trying to explain all of the changes going on in accounting, but in the luncheon I attended in New York City with GE’s CFO Keith Sherin this week one of the points that the CFO discussed was the ongoing accounting reviews and changes. He specifically noted some derivative restatements and said that FAS-133 reviews were ongoing. My own impression is that this is being mandated not just at GE but is much more systemic with conglomerates and SEC reviews in general, particularly as Mr. Sherin noted that FAS-133 needs some simplifications and some more common sense rubbed over it.
Mr. Sherin gave a broad overview of the company, and my own personalysis interpretations will tell you in as close to matter of fact as an outsider can that this is not an issue keeping anyone up at night other than the actual motions and time involved. There are many more positive engines (no pun intended) right now that are acting as drivers for the company. Keith Sherin used the term "growth company" more than once, and with a broad 20% target for return on capital each year you can see why.
Unfortunately the stock market has the sniffles, that turned into a full blown cold Thursday, and if Friday’s end of day trading was any indication then the doctor is worried the market may have to go to the doctor if the patient doesn’t improve this weekend. Hopefully the market will have a bit more stabilized trading next week, because we have a series of segments we’ll be running on General Electric with both sides of the coin on each. But after being able to give this a couple days of segmenting analysis the company sure seems like it has a hell of a lot more going for it in the near future compared to accounting worries that can be blown way out of proportion if they are ’spun’ with a crafty pen. There is always some pause that has to be given now any time there is any word of accounting restatements, but remember that the media can sell you more newspapers and keep you watching longer if they can convince you a scandal is looming.
You should be worried much more about the good old stock market in general dragging GE than this issue, or at least that is the opinion of yours truly. This stock was holding its own quite well and managing to hold $40.00 until the market cracked and if you look at and compare the intraday charts on GE versus the DJIA and the S&P 500 this week then you can see that the DJIA and S&P 500 are pulling GE down rather than GE acting as a catalyst hurting the markets. Anyhow, it is always safe to assume there can be more disclosures such as this, but so far GE still looks like it wants to act as a leader when the market goes up rather than a drag. Stay tuned next week as we roll out some of these feature stories on various aspects of the company with analysis on each.
Jon C. Ogg
July 27, 2007
Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.
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