Warren Buffett dropped GE and signaled the end of an era
- Warren Buffett cashed out of his $315 million position in General Electric, signaling the end of an era and an uncertain future for the $217 billion conglomerate.
- The company has underperformed in recent years. While the S&P 500 returned more than 35% to investors over the past three years, GE returned less than 9%.
- The company's problems won't easily be fixed, according to analysts.
Warren Buffett is out on General Electric.
During the second quarter - as the sprawling conglomerate continued to flounder and announced the exit of long-time CEO Jeffrey Immelt - the Berkshire Hathaway chief decided to move on, dumping what remained of the holdings his firm acquired back in 2008 after lending $3 billion to GE during the depths of the financial crisis.
Buffett cashed out 10.6 million shares worth $315 million, according to filings with the Securities and Exchange Commission. All told, Buffett netted a $1 billion profit from his $3 billion investment, according to the Wall Street Journal. Buffett continues to be a shareholder of Synchrony Financial, a provider of private label credit cards which split off from GE in 2015.
One on hand, the investment in GE was comparatively small, given the breadth and scope of both Berkshire Hathaway, a $432 billion company, and GE, a $217 billion company with massive business units focused on power, energy, oil and gas, healthcare, and aviation.
But losing the imprimatur of the world's greatest investor is no small deal, and it highlights the uncertainty facing one of America's oldest and most storied blue-chip businesses. Coupled with the management overhaul, which came earlier than anticipated, this appears to the end of an era for GE.
"The GE narrative is as open and undefined as it's been in decades," Stephen Tusa Jr., an analyst with JPMorgan, said in a July research note following the announcement of Immelt's decision to step down. "While we expect a fresh start, a positive, we don't see a quick or easy fix to the current predicament."
GE's newly appointed CEO John Flannery faces a mammoth task in righting the ship and boosting profitability.
The company's stock price has lagged, even as the broader market has soared - dropping 20% so far in 2017 while the S&P 500 is up 9%.
GE pays out hefty dividends, but over the past three years, the firm's total return to investors is just shy of 9%. The S&P 500 total return tops 35%.
The company's problem won't easily be solved, according to JPMorgan.
What exactly are those problems? Here's Tusa, the JPMorgan analyst:
"Put simply, poorly timed investments to catch up to emerging markets and ultimately optimistic growth assumptions for 'resource rich' countries, along with a corporate imperative for market share, has left the company with structural over-capacity, mostly in Power/Oil&Gas/Transportation."
Another failing of the Immelt regime was the company's inability to react quickly to market bubbles and industry shifts. Among the market inflections the company whiffed on, according to JPMorgan's research: the gas turbine bubble in the early 2000s, buying "fad of the day" water/security assets in the early- to-mid 2000s, the auto-derivative bubble, the locomotive boom, and the oil and gas boom.
"For various reasons, GE senior management is almost never ahead of the curve when calling market inflections," Tusa wrote in the research note. "To be sure, there is an art to this, and there are few management teams that have this skill, but GE seems to be particularly vulnerable to being late in their market calls."
GE is facing an inflection point of its own right now.
For Flannery to succeed, as he did while running GE's healthcare business, he'll need to continue to trim the unwieldy conglomerate's assets, beef up margins, and double-down on its already respectable digital investments and strategy, according to a Credit Suisse note from June.
The company is more misunderstood than broken, according to Credit Suisse, and a change in regime could well send its stock price soaring and prove the bears wrong. Even Warren Buffett gets it wrong once in a while.
But there's no doubt, with Immelt gone and Buffett out, it's the end of era for GE.