There are many different investment approaches, and many different stocks to go along with them. For example, General Electric (NYSE: GE) is an industrial icon that has fallen on hard times. The "story" is all about getting back to its former glory. Suburban Propane (NYSE: SPH), on the other hand, is a consolidator in a fragmented niche of the energy sector. It's an acquisition and cost-containment story.
When you dig into this pair a little more, however, is either story really good enough to get investors to hit the buy button? Maybe -- but maybe not.
The fallen giant
As far as turnarounds go, General Electric's efforts haven't gone well. The real pain started during the 2007-to-2009 recession, but the root cause was growing under the surface well before that. Effectively, GE allowed its finance arm to expand into areas far beyond its core purpose of helping customers buy GE products. When the financial crisis hit, the company was forced to take a government bailout, cut its dividend, and sell assets. For a time it looked like a successful turnaround was under way, but sizable investments in renewable power and the energy sector upended the process. The CEO was let go and the company started on another restructuring, with more write-offs and a dividend cut. This process happened once more when the company's turnaround wasn't happening quickly enough for the board or Wall Street.
That extremely truncated history brings GE to today, with industry veteran Larry Culp at the helm. He has taken more drastic efforts, including selling a piece of the company's healthcare division, which is one of its best performing businesses. That roughly $20 billion sale has bought the company valuable breathing room on the balance sheet. But when you compare GE to its peers, leverage still remains worryingly high. For example, the industrial giant's debt to equity ratio was roughly 2.4 times at the end of the second quarter, down materially from its peak of around 3.5 times in 2018, but still about twice those of peers like Honeywell (about 1.2 times) and Emerson Electric (roughly 1 times). To be fair, GE's debt includes its finance arm, which is still dealing with its own difficulties. If you pull out just GE's industrial business, its debt to equity ratio sits at a more reasonable 1.4 times -- however that's still higher than its peers, just to a lesser degree. So leverage is better, but GE still has more work to do.
As for the business itself, GE's healthcare and aviation divisions (comprising around 60% of industrial revenue together) have been doing fairly well in recent years. The problem is that the rest of the industrial businesses, renewable energy and power, have been struggling for a while now. Each lost money in the first quarter, which is pretty much par for the course in recent years. GE is working to get these businesses back on the right track, but so far the results of its efforts haven't been very good. COVID-19-related headwinds, meanwhile, haven't made the turnaround process any easier, with the healthcare and aviation businesses struggling now too. In the second quarter aviation actually lost more money than any of the other divisions. And then there's the company's finance arm, which also remains a work in progress.
This is definitely not a good choice for risk-averse investors. There are just too many moving parts and not enough clarity on a timeline for getting the company back on track.
Suburban Propane, meanwhile, is relatively boring compared to GE. It operates in the propane distribution business, passing propane costs on to customers. That allows the limited partnership to largely avoid commodity price volatility. Propane is mostly used for heating purposes, though it has industrial applications, as well. That said, this is really a niche in the larger energy sector, accounting for just 5% or so of the household energy market. Suburban estimates that its market share is about 5%, making it the third-largest propane distributor in the United States. The top three only account for around a quarter of the market.
The big theme here is consolidation, because the rest of the propane niche is made up of a large number of much smaller players. That means acquisitions are a key source of growth, which leads to the need for balance sheet strength to fund a steady stream of purchases. At the end of the first quarter Suburban's financial debt to EBITDA ratio was a relatively high 5.4 times. Its closest peers, however, aren't great comparison points. Ferrellgas, which uses the same basic business model, is struggling under the weight of a heavy debt load, and was forced to eliminate its dividend to conserve cash. And energy conglomerate UGI bought out Amerigas, the largest player in the industry, in 2019. When you compare Suburban Propane's leverage to that of other midstream companies, however, it's toward the high end of the leverage spectrum.
That brings up the impact of weather on the business. Suburban is paid to deliver propane, so demand is key. A warm heating season is bad news for the partnership's bottom line, and this past heating season wasn't a good one. In fact, the partnership just cut its distribution in half, taking it from $0.60 per share per quarter to $0.30 (this cut, which is very recent, isn't shown on the graph above). One of the core reasons for the cut was to help Suburban reduce its leverage. Clearly, the consolidation approach hasn't been working out so well lately. Income-focused investors can easily find better options in the partnership space.
If you had to choose...
Assuming that your only two investment options were GE and Suburban Propane, GE would likely get the nod because of its size and diversification. Suburban, with all of its eggs basically in one basket, is facing hard times, and it has a debt issue.
That said, GE and Suburban thankfully are not the only options you have. Most investors, and particularly those with a conservative profile, should probably take a pass on both names.
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