GE (GE): Cash Rich, Strategy Poor

GE (NYSE:GE) will pick up close to $8 billion in net cash as part of its deal to pass a majority interest in its NBCU unit to Comcast (NASDAQ:CMCSA)leaving the conglomerate with 49%. GE has not done much with the businesses that will be left when its entertainment business is gone, so investors will have to ask if a cash-based balance sheet improvement will do anything for the firm’s share price.

GE’s stock is still 55% below where it was two years ago compared to the DJIA which is off about 20% during the same period. That is an abysmal performance for a company that was once considered the best run large firm in the world.

GE will still be left with a motley group of businesses, except, perhaps, for its large infrastructure operations. Concerns about the company’s capital finance balance sheet have not gone away but have abated some. At one point there was a feat that it could take GE under. In the September quarter, revenue at the unit took a terrible fall from $17.3 billion in the same period last year to $12.1 billion this year. Operating income fell even further from $2 billion to $263 million. GE has made a reasonable case that it is not facing huge write-downs in its financial portfolio from consumer credit assets, toxic instrument holdings, or commercial real estate. But, GE has not made a persuasive argument that earnings at the division can recover quickly.

GE’s real revenue and earnings engines are its technology and energy infrastructure businesses. The company’s energy and oil and gas businesses have been hurt by lower equipment sales. GE’s technology operations have been damaged by slow sales of aviation, healthcare, and transportation products.

GE’s challenge in making a case to Wall St. is based on the argument that it is better off without NBCU. The divesting of the entertainment and news operation will help it focus on “core” business. The flaw in the argument is that these core businesses are not growing any faster than global economy and in some cases are lagging. GE’s earnings may be nothing more than a proxy for worldwide GDP. If so, the company has no story to tell.

Douglas A. McIntyre

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