Should Warren Buffett Buy GE? Stranger Things Have Happened

 | Nov 14, 2017 | 1:00 PM EST
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General Electric's (GE) stock has been in the news for all the wrong reasons this week. CEO John Flannery's much ballyhooed reorganization plan hit Wall Street with a thud and GE shares plummeted into the $18.90s, a level they were trading at in the 1990s.

As I keep putting it in my columns on GE, "the market hates conglomerates," but then I always have to add "except for one." Yes, Berkshire Hathaway (BRK.A) (BRK.B) is still in a league of its own, and as GE fades into irrelevance -- its $160 billion market cap currently ranks it 24th in the S&P 500 by my calculations -- Berkshire (BRK.A and BRK.B) still ranks sixth in the market's overall league table.

In light of all this, the thought of a potential Berkshire investment in GE was intriguing to me. Berkshire's investments in other public companies garner most of the public's attention, a portfolio that currently includes American Express (AXP) , Apple (AAPL) , Bank of America (BAC) , Coca-Cola (KO) and Wells Fargo (WFC) as its top-five holdings. So, this could be a chance for Buffett to get GE shares on the cheap and re-enter a name with which he is very familiar.

At the bottom line, though, I have been recommending investors stay away from GE shares because of, well, the bottom line. GE's earnings guidance was truly dreadful in Monday's announcement, overshadowed as it may have been by the halving of GE's quarterly dividend. At the midpoint of management's guidance ranges GE expects to produce earnings per share of $1.03 next year versus $1.07 this year. While the magnitude of the decline might not be great, one has to ask oneself "why would I buy a company with declining earnings?"

The global economy is hitting on all cylinders in a way that it has not since the financial crisis. The "Trump Jump" is in full effect here in the U.S., economic indicators are improving in Europe and there are no signs of a slowdown in China's insatiable appetite for global commodities. So, if an industrial conglomerate can't produce earnings growth against that backdrop, why bother?

I have no answer for that question and am not buying GE shares for my clients. So I certainly wouldn't recommend an open market purchase to Mr. Buffett, even if news of his involvement would likely produce a temporary bounce in GE shares.

GE is basically a maker of world-class aircraft engines (and, importantly, the accompanying spare parts) wrapped inside a bunch of less attractive businesses. Forget locomotives, GE's outlook for its Power and Healthcare segments was downright downbeat in Monday's presentation, and it is going to take more than $57/barrel oil to get Wall Street revved up about the GE Baker Hughes (BHGE) oil services business.

That flip description of GE as an aviation company stuck inside a menagerie of less-than-appealing industrial businesses captures one possible endgame for the company, though. Berkshire owns Precision Castparts, an early 2016 purchase, and Buffett has signaled his continuing interest in the aerospace sector. So, instead of buying GE shares, it would make more sense for Berkshire to buy all of GE. Buffett lieutenant Todd Combs -- a longtime owner of Precision from his days as a portfolio manager -- could be given the mandate to build an aviation behemoth inside the Berkshire structure.

So, that's my bold idea. Put together the market's two largest conglomerates -- one loved and one loathed -- and create a new Berkshire.

Berkshire's industrial (non-insurance) businesses have always struck me as an unimpressive collection of low-value-added, domestically focused businesses. Did you know that McLane, the food service distributor, is actually Berkshire's largest non-insurance business, with nearly double the revenues of Kraft Heinz (KHC) and more than double the sales of Burlington Northern Santa Fe? I don't think many people know that. GE's global reach and culture of innovation would address those issues immediately for Berkshire and Buffett.

The other reason I don't own Berkshire shares is the company's dreadfully underutilized balance sheet. Just too much cash, $104 billion as of Sept. 30, which kills ROE (return on equity). Well, levering up (slightly) to buy GE would solve that problem -- and yet still leave Berkshire in position to maintain its status as a top-tier credit.

So, that's a suggestion from the Guru to the Oracle. Put GE out of its misery and rejuvenate your industrial franchise in the process. Stranger things have happened.

GE and Apple are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells GE and AAPL? Learn more now.

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