We just can't get our arms around the stock of General Electric (GE) .
Last night, when GE was unceremoniously booted out of the Dow and replaced by Walgreens Boots (WBA) , the first thing I heard was "this has to be the bottom."
It's something we have heard every step of the way from when John Flannery replaced Jeff Immelt in August of last year when the stock as at $25. We heard it when Immelt could no longer continue to destroy the company now that Flannery was there. We heard it when the big estimate cut came in October. We heard it when the dividend was halved in November. We heard it when the giant long-term care charge was taken in January of this year.
The bottom. The bottom. The bottom. The bottom. So now we are supposed to believe that being kicked out of the Dow is the bottom? We need more than the irony of the last of old companies succumbing and being thrown out of the Dow after 111 years.
Yet, it's something I imagine we will keep hearing because almost nobody, except perhaps Steve Tusa, the prescient analyst at JP Morgan, who has been negative on the stock from the high 20's, can believe exactly how bad off GE really was under Immelt.
Why is that?
I think it's because GE's financials were as opaque as you could have them be without having the SEC come down on the company and demand changes at the top. Uniquely opaque.
The idea, for example, that this company had to take a $6.2 billion charge against earnings at the beginning of the year for long-term care contracts that were on the books since 2004, and then add a $15 billion reserve to GE Capital for more liabilities from these contracts, just makes you feel like it doesn't even matter what the real earnings are, not that you can tell what they are anyway. I say that because we had been told a few months before that the CFO Jamie Miller had told us that the company would likely take a $3 billion charge for these contracts.
That disclosure made the exercise of figuring out how aerospace and health care and construction and power and water and oil and gas and transportation are doing pretty meaningless. It became like asking how were the accommodations and the food on the Titanic. They missed the big picture iceberg, an iceberg that still might be doing damage. You see you can't really figure out the extent of the damage from long-term-care contracts because the cost of health care keeps going higher, the life expectancy keeps getting longer for policy holders, and the cost of in-home care at a time of tremendous nurse labor shortages is staggering.
That's why it's so difficult to believe we are at the bottom. That plus the fact that one of its biggest divisions, power, one that was effectively doubled down on with the incredibly foolish Alstom capstone acquisition by Immelt, may require a gigantic and immeasurably large charge given how quickly the natural gas turbine business is shrinking.
I know there's plenty of irony to go around for this once great manufacturer to be replaced by a drug store chain. I get that.
But what matters is that we have to recognize that GE changed a long time ago. We just didn't know it. GE manufactures great jet engines. It has terrific long-term jet engine service contracts with great gross margins to serve. It has top-flight health care equipment. It's got decent energy exposure.
Nevertheless, as the charges show, GE was mainly a real bad financial company that sold off two of the best parts, NBC and Synchrony in 2011 and 2015, respectively at and near the bottom and went all in oil and gas at the top.
I know that NBC was an afterthought to GE. But it's ten times the company now at Comcast (CMCSA) . I know that Synchrony was considered part of the atavistic portion of GE Finance but at least it had some real value that could have been used to offset these long-term care charges.
But what really matters, still, is long-term care because that's what could cause the dividend to be cut again.
Health care in the Dow with Walgreens. Health care out of the Dow with GE.
That's the only real irony I know. When long-term health care is at last behind them and the multi-billion dollar charge gets taken for shrinking the power division, then we can talk about a bottom. Until then, irony is not a financial concept, just a financial tragedy.