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Much has been written about the trouble General Electric's (NYSE: GE) Financial Services division is having in the current global crises centered on high-risk leveraged loans and multi-leveled derivatives. It is true the company is seeing its share of the pain, and truth be told, I do not think anyone actually knows how deep the total pain will be. Today, GE announced a December 2, 2008 conference call to enlighten investors.GE is also being affected by slowdowns in the aircraft industry as everyone defers large capital expenditures.
About six weeks ago, after my pal Warren offered to prop up GE with a $3 billion dollar loan with warrant rights and the stock dipped still further, I posted Chasing Value: General Electric is screaming to me! and I was a buyer. The stock then dropped another 35% through this week (brilliant timing), so while I jumped in too early I have to believe it is even a bigger bargain and I will buy more.
If you cringe every time you hear about GE's financial sector woes, then you should smile every time you hear someone chime in about the need for infrastructure projects. Projects that need to get done and projects that would be money wisely spent with long-term benefits. Re-think new stimulus package? Push infrastructure!
GE remains a world leader in water & power projects; today it was reported that GE Energy landed $1 billion contract as one example. There will be opportunities in water purification as well. Despite the fact that the surface of the earth is covered with the stuff in great abundance, potable water is in limited supply and in many cases we pay more for water than fuel. It would not be hard to argue that we have more alternatives for energy than we do for drinking water.
GE is currently paying an 8.8% yield while trading at a trailing P/E of 7.5. If GE reported earnings down by half, the P/E would still be lower than its historic levels. If the yield were cut in half, or more, which is a possibility, you would still be receiving a healthy return while you wait for the economy to recover. The stock closed today at $15.77, up $0.51 or 3.34% .
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of GE stock.
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Reader Comments (Page 1 of 1)
11-26-2008 @ 5:14AM
al coholic said...
I've never paid too much attention to GE and what you say makes sense. But what about the 558 billion in debt?
11-26-2008 @ 6:04AM
Dan Barnett said...
al,
Spending on infrastructure spends money in America, produces jobs in America, pays Americans to work, who then spend in America, from American stores, who then have higher sales figures, who then hire... well, you get the point.
Borrowing for infrastructure improvements doesn't scare me.
11-26-2008 @ 7:56AM
Sheldon L said...
Al C,
For all the reasons Dan mentions and more the payback on infrastructure is almost the only thing the government can do that has a true value... for many decades. It is also critical to remember that this is something that has to be done anyway. As one example, check out the decrepid state of our 100 year old municipal water works.
11-26-2008 @ 9:15AM
BBOB said...
IF THEIR STOCK IS AS CRAPPY AS THEIR APPLIANCES I WOULDNT BUY IT IF WAS 25 CENTS A SHARE
11-26-2008 @ 9:31AM
Bounrith Ly said...
I like how you put your money where your mouth is and suffer along with us newbie to the market. Thank you. Having said that I am not too thrill to have government spend more and more on virtually anything.
11-26-2008 @ 11:53AM
Sheldon L said...
BL,
Water projects are required now, no matter what state the economy is in -- nothing I wrote fosters the idea we should spend on "virtually anything". I was very specific.
11-27-2008 @ 6:11AM
al coholic said...
I was refering to the 558 billion dollar debt GE has. Are you telling me this is debt incurred by GE for infrastructure improvements?
11-27-2008 @ 9:03PM
Sheldon L said...
al c,
According to what I see in the financial statement you are correct about debt but they have contracts / receivables scheduled of about $400B in place now so covering debt is not a problem. I think the bigger problems are always the unknown -- like what the derivative exposure is. That is what we hopefully learn on Dec. 2. I have faith my pal Warren has looked at this already I HOPE!
11-28-2008 @ 5:20AM
al coholic said...
Thanks for replying. You are one of the few here who does.
I'm not qualified to interpert GE's financial information though, as you noted, Warren is and apparently is ok with it. I was just wondering why GE has such a staggering debt.
I live in Greenville, SC where GE has a large turbine plant. Over the years employment has yo-yoed up and down every few years or so, depending on how many turbine orders are placed or cancelled, I guess. It just seemed to me that a company like GE, as large as it is, would have paid down their debt when times were good so they woldn't have to get money from a guy like Buffett, who's money comes at a steep price. Maybe Jack wasn't such a magician after all.