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Reading the dollar signs between GE's lines
Posted By Porter Stansberry On 01/28/2010 @ 12:06 am In Commentary | Comments Disabled
It’s always interesting to see how companies handle a crisis. The gap between what managers should tell shareholders and what they actually say is always greatest when the news is truly dire. With that in mind, let’s take a peek at GE’s latest earnings announcement…
The headlines looked great: “Equipment orders up 25%” … “GE business model performing well” … “Strong industrial cash flow” … And all of the numbers that the accountants can massage don’t look too bad. Net income, for example – which is completely a product of accounting and totally meaningless both to real creditors and real equity holders – came in at $3 billion for the quarter and $11.2 billion for the year.
I can see an elderly retired couple who own GE shares thinking, “Wow… that seems like a big pile of money. Maybe we should buy more shares.” Someone was certainly impressed with the numbers: GE shares were up as much as 2.5 percent after the announcement.
But what about the serious challenges the company faces? Here’s what GE CEO Jeffrey Immelt said: “During the difficult economy of 2009, we took a series of actions to improve GE so that we would be positioned for growth in the future. We have repositioned GE Capital to be safer and more focused. We have lowered our cost base and simplified our portfolio. At the same time, we grew GE R&D spending by 7%, expanded our product lines and made dynamic global investments. We are positioned to win in this environment.”
When you see the CEO of a massively indebted company promising to “win”, you know there are big problems ahead. There is no legal definition of the word “win.” He is promising shareholders precisely nothing. And nothing is what we are sure they will get.
A few facts we didn’t see highlighted anywhere in the company’s 10-page press release “summary…” First, even though the company’s accountants manufacture earnings, they were still down 19 percent from a year ago. That’s because revenue dropped 10 percent. Immelt did admit earnings will remain flat in 2010 and 2011.
What he didn’t admit is the company is so horrendously indebted it cannot hope to ever return to honest profitability. Let me show you why…
At the end of 2009, GE had total debts of around $600 billion. But it only spent $18.8 billion in interest. That’s pretty incredible, isn’t it? That’s only a 3.1 percent interest rate. Keep in mind that in 2008, when GE had roughly the same amount of debt, it spent $26.2 billion in interest. How did GE cut its interest expenses by almost $8 billion?
What’s not mentioned anywhere in GE’s press release is the company would have gone out of business last year had the government not stepped in to guarantee all of its debts. That guarantee allowed GE to save roughly $8 billion to $10 billion in interest expense this year – about twice the amount of money it recorded as “profits.” These guarantees all expire in June 2012. And what will happen then? Is GE really making any money today? Is there any way it will ever be able to pay off these debts?
We believe the answer is: No chance.
Consider these facts. Based strictly on today’s number, Egan-Jones, the only dependable credit-ratings firm, upgraded GE’s debt to A from A-. But that’s still just two notches above junk. Just to be very conservative, let’s pretend GE is still an investment-grade credit. In that case, GE should be paying around 8 percent on its long-term debts, which are roughly $500 billion.
So soon, GE should see its interest expenses double, from around $20 billion to more than $40 billion. And keep this in mind: The firm only earned $29 billion in operating income for 2009. So assuming it forgoes all of its other operating expenses – like capital investment and repairs – it would still go bankrupt.
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