Tuesday, June 06, 2017

The Two Buck Shuck and Jive*

Amazon today began targeting low-income shoppers with price cuts to its Prime membership program.   Apple yesterday jumped into the voice-controlled home speaker business to compete with Amazon’s Echo and Google’s Home.  Google’s Waymo self-driving vehicles logged 25,000 miles hands-free last week, on top of 3 million miles already driven, mainly in cities, on the way to “fully self-driving cars” in the not-all-that-distant future.
So what is GE, the great American conglomerate that Jack Welch famously built through Six Sigma training, portfolio slight-of-hand and ruthless personnel management doing these days?
Well we’re not sure because mostly what we hear from GE is that GE is, or was, going to make $2 a share next year, and whether they do or not is all anybody seems to care about.
Not whether GE is involved in self-driving cars or self-regulating homes or any other enormous market opportunities those of us lucky to be alive right now are seeing develop right before our eyes.
Just this: will they or will they not earn $2 a share?
Now, that two bucks earnings target was disclosed last spring at GE’s 2016 shareholder meeting, in CEO Jeff Immelt’s loopy, shorthanded fashion, as follows:
From a financial standpoint, people that are investing in GE right now can look out over the next couple of years and see a very clear walk to hit in excess of $2 a share by 2020. This has to do with using the GE Capital proceeds to buy back stock. We use our float. The Alstom earnings, which are very clear and measurable and we're making good progress on those, and just sustaining our industrial growth the way we have over the last four or five years.   You do those things, you get north of $2 a share by 2020—or by 2018.  (Source: Thomson StreetEvents)

After a less-than-upbeat analyst day in December and an earnings report in April that was long on earnings and short on cash flow, however, Immelt took the opportunity to walk back that two-buck number in May as being “the high end of the range,” cautioning that “resource markets” must remain “stable” to hit the two bucks.
By “resource markets,” of course, he means “oil prices,” upon which a decent portion of GE’s earnings now depend thanks to the M&A push the company made into oil and gas-dependent businesses prior to oil’s 2014 collapse—in particular the $3.3 billion purchase of production equipment supplier Lufkin that top-ticked the price of the commodity on which its business hinges the way John Paulson’s housing short top-ticked the greatest financial crisis since the Great Depression.
Given that GE’s stock sits on its 52-week-lows while the S&P 500 keeps breaking to new all-time highs, it’s clear the buy-side doesn’t believe the two-buck number, no matter how often Immelt defends it, and the sell-side seems nervous too, particularly after the first quarter’s cash flow miss. As the Merrill Lynch analyst dryly noted, GE’s Q1 cash flow disappointment “seems to be related mostly to the fact that GE’s latest contracts are coming from regions that tend to pay their bills later.”
Not a good sign for the two bucks target.
After all, GE is a conglomerate, and not in the JNJ “steady-Eddie” sense of selling basic products for the health and well-being of consumers.   
No, GE is a conglomerate that sells highly engineered, high priced products and services to airlines, oil companies, power generators, developed governments, undeveloped governments and about-to-be-toppled governments, among other unpredictable buying classes.
So how predictable can GE’s earnings possibly be?
“Plenty predicable,” a reader with grey hair might respond.  “Jack Welch made GE a beat-the-earnings-by-a-penny machine back when.”
And “Neutron Jack,” as he was known for the way he emptied buildings in his hunt for efficiencies, certainly did make GE that kind of machine, even humble-bragging about it in the 1999 annual report:
 
But “making the numbers at GE” was no doubt a whole lot easier when GE Capital was a readily available hat out of which rabbits could be pulled whenever the quarter had to be beaten by the proverbial penny.
And that trick ended in 2008 when the particularly addictive brand of Financial Fentanyl on which GE Capital had gotten hooked—CDs—froze up, leading the Feds to step in and guarantee $139 billion in GE Capital debt in order to keep The House that Jack Built from falling down like, well, like a house of cards.
It always seemed to your editor, even back when GE was beating every quarter by a penny and almost every other company in the S&P 500 wanted some of that “Six Sigma” magic (the way almost every other company in the S&P 500 today wants some of that “Zero-Based-Budgeting” magic from Warren Buffett’s ruthless buddies at 3G), that Jack had turned GE from a company that made stuff (refrigerators, lightbulbs, jet engines, turbines etc.) into a company that made the numbers.
And when all you make is “the number,” nobody knows or cares what’s behind that number.   It could be asset sales and tax gimmicks and channel-stuffing and worse, or it could be great products—and GE makes some great products, still, todaybut you wouldn’t know it because it’s all about “the number.”
In this case, two bucks.
Now, as most people who live on the West Coast know, including the folks working on autonomous vehicles and magical voice-activated home controllers and the development of a logistics infrastructure that allows anyone with an internet connection, a credit card and an address to order anything, anytime, Trader Joe’s sells a wine call “Two Buck Chuck.”
“Two Buck Chuck” took the market by storm when it came out back when, and it is still called “Two Buck Chuck” despite the fact that it is today priced at $2.99 a bottle and the brand name is actually “Charles Shaw,” not “Chuck.”
And all we can think of is how silly it is that the public perception of one of the world’s largest and most valuable companies comes down to an artificially constructed net per-share earnings number that happens to round to two bucks.
Call it the “two-buck shuck and jive.”
We’ll take the under.

*  This virtual column was posted Tuesday June 6, 2017.   On Monday, June 12, GE unexpectedly announced that one Jeff Immelt is leaving the CEO position August 1 and retiring as Chairman December 31, 2017.   One John Flannery is being appointed to take his place in both roles.  The two-buck shuck and jive is, we'd bet, history.


Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2015)    Available at Amazon.com

© 2017 NotMakingThisUp, LLC



The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: the content herein is intended solely for the entertainment of the reader, and the author.