I apologize in advance for the disorganized and inconclusive nature of this write-up. By this point, I’ve read a little about GE. It’s a stock many of you have said you’d like to hear about. And yet, I’m not sure I have anything worthwhile to say about it quite yet. This piece is the best I can do for now.
So, this isn’t even an “initial interest” post. This isn’t step one of my analysis of GE. This is step zero. The company is that difficult to understand, value, and analyze. I’m writing this piece about GE now to sort of lay out what I would need to know later to be able to start analyzing this thing.
In preparation for this piece: I read GE’s shareholder letter, 10-K, the most recent earnings call transcript, and an investor presentation.
Of those: the shareholder letter is the easiest read. So, I recommend you read it now.
GE’s Letter to Shareholders
I’m going to walk you through the notes I took while reading this letter.
“While most of our businesses delivered solid – and in the case of Aviation and Healthcare, world-class – performances, our cash flow was challenging.”
This is our first hint that I’m not going to be able to value this thing. As an investor, I tend to limit myself to free cash flow generating businesses. It’s not real clear GE generates a lot of free cash flow. And the difference between free cash flow and reported earnings in some of the businesses GE is in – like power, aviation, and transportation – can be big. Power and aviation are two of GE’s biggest businesses and they involve the sale (usually financed) of extremely long-lived equipment. I’m ignorant of most of the businesses GE competes in. But, I have researched a couple companies related to GE’s power business: the combined Babcock & Wilcox (see the “report” section of Focused Compounding) and Aggreko. Aggreko is a stock I’ve never written about. But, I have researched it. As part of my research into Aggreko, I actually looked at a competitor that was renting out GE turbines as a source of temporary, mobile power. I don’t mean to suggest these businesses are true peers. For example, the core competency at Babcock was working with steam. GE’s power business is like 95% not steam. But, there are some similarities. And the point I’m trying to get to here is that the cash profitability of these customer relationships can be really uneven in terms of timing. You can make nothing upfront and then have very high cash profits on maintenance work you do many years later. The important figure to focus on is the lifetime value of the customer in terms of something like a DCF. Whether GE is focusing on that or not is kind of tough to tell from the 10-K. And it’s extra complicated in the case of GE, because there’s sometimes also the involvement of GE Capital. The …Read more