GE Aerospace (GE)

This continues to be a work in progress. Everybody was in love with Jack Welsh and what he did with GE, until what he did wasn’t so good. Their big financial exposure in 2008-2009 really hurt the company. To undo this is a long, slow process. He likes the core businesses and that they are trying to lessen their financial exposure. This is a good, long term hold.

This is getting expensive from his Fair Market Value calculations. Has a target of $28-$29, which would carry it up to about 2X Book Value, which is all that the market is going to give you. This is a tired conglomerate. When that happens, the conglomerate starts breaking up and releases all kinds of phenomenal value.

He has been disappointed in it. It is a proxy on industrial America and performed quite badly. He sold it earlier in the year. He prefers chemicals. He would move on to one such as Dow Chemical.

Likes the industrial space in general for the economic pick up. Companies that are in the turbine and power generation space would do quite well. Trading at 14X earnings with probably a 10% earnings growth rate.

Likes this. Going back to its industrial roots means that you’ve got growth. You probably get a higher multiple because the market would then like it.

In the process of streamlining its business. They are trying to parcel out the financial arm of the business. This helps them to hone in on what is really doing well for them, the industrial front, jet engine, power generation, etc. Have their hand in so many different areas. If the biggest growth component is on the industrial front, he would probably look to a company that is a little more honed in on that space such as United Technologies (UTX-N).

The ultimate diversified conglomerate. A nice stable business that is going to give you low, single-digit total returns from an earnings growth perspective. The multiple of 15X is not rich. Always trades at a discount just because it is a large conglomerate. Recently got permission from the French government to bid for their power and grid business. This will be done in 3 joint ventures, so it will be less of a capital outlay and de-risks the initial investment. Dividend is going to continue to grow at mid-single digit levels.

Prefers Honeywell (HON-N), which has good exposure to the domestic market. We are seeing a pickup in manufacturing in the US where Honeywell has a much higher percentage of exposure. Also, excited about some of the divisions in Honeywell.

It is pulling back because of the market pulling back. Their recent acquisition could be causing a breather. She likes the industrial space. 40% of GE’s earnings are from financial services, which hampers valuations and they are working that down. That is why she does not own it.

Model price is 22.97, a negative 14% differential. Lead weights on their feet. They are trying to jettison some of those assets out the door. This company has to be reorganized. A chronic underperformer. The GE capital division is rotten and they need to get rid of it.

They made a large acquisition that was probably not the perfect scenario. It is a direction that he applauds because it takes them back to their industrial roots. 2016-7-8 will give them a pretty good future as they spin out a portion of GE capital. He likes them.

The spin-off of their financial division is the smartest thing they could be doing. There is a great lifecycle in conglomerates. They start off and pull together all kinds of companies, and they grow and grow. Get to their “level of incompetence” where, on the next acquisition, they will have to buy the other half of the world, and then things stop. It doesn’t have anything in the way of upside potential, but what it does have are all these wonderful companies inside it. So the 2nd part of a good conglomerate is where they start to spin off the parts. It turns out that the sum of the parts is worth an awful lot more than the whole.

A massive conglomerate. It’s hard to grow these things. This is the 2^nd half of the business cycle and industrial activities tend to pick up and broaden out. She wouldn’t trigger any capital gains by selling. Of all times, this is when you want to own it.

If we go back 5 years to 2009, GE is about equal to about where the S&P 500 is. It has done about the same. But this year it has underperformed it. So it is relatively cheap and he would call it a buy. If markets pull back then it would too however, even if a little bit less.

Have all kinds of exposure from an industrial standpoint. The knock against them, which he thinks they are fixing, is the black box as people can’t understand what the drivers of the business are. Is it finance, appliances, power generation, aircraft engines, etc? Over time he thinks the company will prune the portfolio. Has been a laggard.