General Electric (NYSE: GE) has done itself no favors trying to live up to the weight of its name in a world of specialization. Looking at the company's record of acquisitions and divestments over the past 20 years reads like some sort of stereotypical Millennial start-up — albeit with a multibillion dollar budget — hiring and firing entire subsidiaries like employees, unsure of the mix it should employ to provide value to its investors.
On paper, GE competes with other "international conglomerates" — companies like Siemens (OTC: SIEGY) and United Technologies (NYSE: UTX). In reality, GE spread itself far too thin in the Immelt (CEO from 2001-2017) and Flannery (CEO from 2017-2018) eras, lagging behind market trends with off-brand deals into banking and entertainment while selling off core operations, like its 1993 aerospace sell-off, which eventually became part of Lockheed Martin (NYSE: LMT)
Image Source: General Electric
The result of these moves? Without a true point of convergence, GE's weaker subsidiaries exercised undue influence over its total business. The company got crushed in the early 2000s dotcom bust and again in the 2008 banking crisis. It never really recovered from either of these setbacks in the same way as Siemens, 3M (NYSE: MMM) or Boeing (NYSE: BA). Nearly any company worthy of being called a competitor to GE has experienced exponential gains since 2000 and again since 2008. GE's current rebound actually comes off of a 2018 low of $7.21, which was lower than its previous 2009 low of $8.18.
GE Owes Investors
GE also faces accusations of hiding around $29 billion of debt and has admitted that new Financial Accounting Standards Board (FASB) accounting standards will "materially affect its financial statements." We also know that the company's overall debt-to-equity ratio remains high for its industry, 2.67 compared to a 0.94 industry average. The troubled GE Capital arm, home to a long-suffering insurance business, is at a 4.4 debt-to-equity against a 2018 average of 3.14.
To its credit, GE seems to have figured out that it should not compete in the financial services industry. If it has to sell off equity in GE Capital to cover debt, as it sold its online banking platform to Goldman Sachs (NYSE: GS) in 2005, this could be interpreted positively. At least a part of the rebound could be attributable to GE announcing 20,000 frozen pensions — a move that would normally speak to a massive failure in the core infrastructure of a company. It's no good for those employees, to be sure, but it does represent GE ruthlessly holding to its Immelt-era promises to consolidate its businesses and shore up liabilities.
Is This the Turnaround We've Been Waiting For?
GE has experienced about a 30% gain from nadir to zenith over the last few months. The market is moving the headwinds out of the way, with the S&P hitting record high. Everything seems to be headed in the right direction for GE, but the stock has quite a long way to go to return to its former prominence or that of its competitors.
Should GE continue to consolidate around its best performing subsidiaries and avoid debt traps with its creditors, the mistakes of the past few years just mean a huge upside potential. Even at a high on the year, GE's attractive valuation makes it a cheap speculative play that shouldn't hurt too much if it falls again, assuming you give it only the position it deserves among the more trustworthy picks in your portfolio.
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Chris Davis has no position in any of the stocks mentioned. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.
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