According to the news report by Bloomberg, Aswath Damodaran, a New York University Finance Professor feels that General Electric Co.’s stocks are currently seriously undervalued. He said that this happened because the market over-corrected for the many mistakes that the conglomerate has made.
GE is undoubtedly unwieldly, has a big pile of debt and a group of businesses that are slow growing, such as its power equipment, medical scanners and jet engines businesses. However, Damodaran feels that the retrenchment of the company in businesses where it has a competitive advantage should actually take its shares up to nearly $11.
On Wednesday, the company’s shares dropped another 3.4% to $8.32. The struggling company’s market capitalization also dropped to $72.4 billion. Since the end of 2016, General Electric has lost nearly $200 million in market value. And since its peak under the aegis of Chief Executive Jack Welch in the 2000s, the company has lost over half a trillion dollars in market worth.
According to Damodran, if GE were to sell off the companies that non profitable, then it could increase its share price by another dollar. The challenge is that fire sales of entire companies never really bring in the expected or hoped for price since buyers, knowing the company is desperate, will offer lower bids.
Damodaran stated that GE is in a difficult place. There are massive risks the company is facing. For example, acquisitions are out of the question, as is reinvestment since that would require immense capital and would spell disaster for the already struggling company.
The Professor said that the new Chief Executive Officer, Larry Culp, who led his previous company, Danaher Corp. to great success, should not look at rebuilding the GE Empire at this time. Rather, he should be looking at liquidating the non-performing businesses for the greater good.
What makes it even more difficult for GE is the greater than $100 billion debt the company has as well as its decreasing credit rating. In fact, Damodaran states that the debt factor in GE finance division is so high, that if the company were to try to sell that unit, GE would suffer p to $24 billion worth of losses over a period of time.
Damodaran feels that if GE is able to lessen its debt burden and focus on streamlining itself and keeping its goals constrained, then it stands a chance of surviving. Not only that, it could reclaim its place as a holding stock for conservative investors.
Damodaran stated that he would definitely buy GE shares, however, he would do while being completely aware of the substantial hurdles the once thriving company faced. He said he would invest in this company even though it would not be able to pay out dividends until its debt was paid down and it had managed to exit the capital business with as few costs as GE could manage.
Seeking Alpha just reported that GE announced that it had majorly accelerated its plan to spin off its Baker Hughes GE business. The company also stated that it was going to strengthen its ties with the business unit before they became two separate entities.
It seems that the company had the same idea as Damodaran. While these developments are a little disappointing, this strategy will bring in more than $3 billion in cash in the short term. Investors agreed that this was the right step to take as it was good for both GE as well as its subsidiary Baker Hughes. According to analysts, investors should feel generally bullish about these changes.