Imagination at Work

GE Investors Can't Count on Warren Buffett for a Quick Fix

Whether or not there's truth to rumors of a possible Berkshire Hathaway stake, it's likely to be a long, slow grind for the industrial giant.
Photographer: Michael Nagle/Bloomberg
GENERAL ELECTRIC CO
-0.06
At Closing, May 18th
14.97 USD
BERKSHIRE HATHAWAY INC-CL A
-2060.00
At Closing, May 18th
294380.00 USD

Warren Buffett is many things, but he probably isn't General Electric Co.'s savior this time.

Shares of GE spiked as much as 6.4 percent on Tuesday amid rumors that Buffett's Berkshire Hathaway Inc. would invest in the $118 billion company. There's no clear genesis for this chatter or a logical reason why it should surface today. Odds are the bounce was simply a recovery after several days of heavy selling last week on little new information. If anything, it just shows how desperate GE investors are for some good news, however tenuous it may be.

Chill Out

If speculation of a Buffett bet is behind GE's pop on Tuesday, that optimism seems misplaced

Source: Bloomberg

Berkshire gave GE a cash infusion during the financial crisis, but has sold the bulk of its resulting equity holding, including a decent-sized divestment in 2017. Another capital injection could ease fears of a liquidity crunch at GE and guard against the risk of a credit downgrade. But CFO Jamie Miller said clearly in February that there were no plans for an equity raise, and it would be unusual for Buffett to re-up his investment so soon.

Buffett was asked about buying GE shares during a CNBC interview in February, and to me, at least, he didn't sound particularly enthusiastic. Buffett likes to invest in companies he understands and in management teams he can back. He told CNBC he was "staggered" by GE's $15 billion reserve shortfall in a legacy insurance business and that while his managers would be capable of understanding some of GE's businesses, "I don't understand the whole place."

And that's really the key here, because I'm not sure anyone at this point understands the black box that is GE, including, arguably, management. GE revealed the results of CEO John Flannery's "exhaustive dive" into the company in November, but two months later, it disclosed the insurance charge. A Buffett stake would be a vote of confidence in the company's ability to survive its laundry list of potential liabilities, but it's unclear where one would find that kind of confidence.

There's still a risk of more charges at GE Capital, including a legacy subprime-mortgage business that's under investigation by the Department of Justice. Meanwhile, and perhaps more importantly, GE disclosed earlier this year that the Securities and Exchange Commission is investigating how it accounted for service contracts. This had already been a watch item for analysts. Given how significantly the power markets have deteriorated of late, it seems likely that some of the underlying profitability assumptions on those contracts weren't conservative enough. That could force GE to admit it booked more profit from those agreements than will actually arise and further temper the future cash flow potential of its already challenged businesses. GE may also have to write down goodwill related to its acquisition of Alstom SA's energy assets.

Wrong Direction

Analysts have continued to lower their expectations for GE's 2018 earnings even after new CEO John Flannery heavily reduced expectations

Source: Bloomberg

It would be more likely for Buffett to put some of his massive cash pile to work buying businesses GE is looking to sell. The locomotives division could be an interesting fit with Berkshire's railroad Burlington Northern Santa Fe, though such a deal may also pose antitrust issues or damage relationships with other customers. But the idea of a transportation divestiture isn't new. GE included that unit in its proposal for $20 billion of asset sales. Investors have already rejected that plan as insufficient to fix GE's woes. The fact that Buffett might pick up some of these unwanted units doesn't change that reality. 

There really is no quick fix for what ails GE. It's likely to be a long, slow grind for any investor.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Brooke Sutherland in New York at bsutherland7@bloomberg.net

    To contact the editor responsible for this story:
    Beth Williams at bewilliams@bloomberg.net

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