I wrote recently that there were three questions that Jamie Miller, the new chief financial officer of General Electric GE, had to answer at two investment conferences she was speaking at this week. She did -- but I found a distinct lack of clarity in her answers.
The three questions I said she had to address were:
- How to fix GE Power;
- What steps GE management team is taking to prevent future blow-ups; and
- Cash, cash, cash.
After all, anyone who buys a turnaround play (as GE is these days) must have complete confidence that management can identify a bottom and is taking the proper steps to maximize shareholder value during a recovery.
Unfortunately, the fact that I uttered an audible "Oy!" while listening to Miller's presentation at one of the conference shows that I didn't get the clarity I'd need to buy GE shares for my clients. Here's what I thought of what she said:
Miller indicated that management is hopeful that GE Power will stabilize, but isn't fully confident that will occur in 2018. That's scary, and probably reason enough to avoid GE.
The CFO did focus on the benefits of servicing an installed base of equipment sold by GE Power. But when new-equipment orders are down in excess of 30%, investors don't care much about spare-parts sales.
Honestly, I'm no more confident that the end market for large industrial turbines has bottomed out than I was before listening to both of Miller's presentations. That's a huge red flag.
Preventing Future Blow-ups
Miller's words regarding this had less impact than a Wednesday The Wall Street Journal story about how former GE chief Jeffrey Immelt had created a culture where managers were afraid to come to the C-Suite with bad news.
As I listened to Miller throw around buzzwords instead of directly outlining changes in strategy (hence my "Oy!"), I got the sense that nothing has changed culturally at GE. That's another red flag.
The great thing about cash flow is that it never lies. It's just as easy to measure the cash flows of Amazon (AMZN) as it is to analyze that of one of the microcap stocks that I follow.
However, the problem with GE is that its corporate structure is so byzantine that cash can just disappear down rabbit holes. We saw that in a January announcement that GE Capital would need to increase reserves for insurance policies that hadn't been written in more than a decade.
Wednesday's "truth bomb" was Miller's concession that GE would need to pre-fund pension liabilities by $6 billion in 2018. At the risk of restating the obvious, these aren't the best of times at GE, and the company can't afford to throw around $6 billion here and $6 billion there.
The Bottom Line
Most of the Q&A sessions at Wednesday's conferences were dedicated to GE's potential portfolio restructuring. Miller stuck with the party line of a 12- to 24-month timeframe for optimizing GE's business mix.
Frankly, that's just too slow. I'm sure it's a Herculean task to analyze a diverse, global set of businesses such as GE's, but I'm into value investing, not value judgments.
The bottom line: There are many other S&P 500 companies out there that lack GE's performance issues. Until I hear more clarity from GE management, I'll continue to put my clients' dollars there instead.