A Detailed Look At Why GE’s Stock Has Underperformed The Market Since The Downturn

Since the financial crisis, General Electric’s (NYSE:GE) stock price has collapsed – destroying about $200 billion in shareholder wealth. The company’s market cap was almost $300 billion before the downturn but slumped to just $50 billion in early 2009 due to concerns about the quality of assets held by GE Capital at the peak of the recession. The company’s market cap recovered to $250 billion by mid-2015, though, and remained largely around that level till early 2017 before sliding again to settle at its current level of $90 billion.

General Electric’s journey over the last decade has been marred by inappropriate acquisitions which adversely affected its revenues and profitability. Trefis summarizes how the factors that have impacted the company’s performance and, in turn, its stock price over the last decade in the interactive dashboard – Why Has GE’s Stock Under-performed The Market Over The Last Decade?  Additionally, you can see more Trefis Industrial company data here.

How Does GE’s Stock Performance Compare With The S&P500 and DJIA?

• While major market indices have achieved an average annual growth of 11% over the last 8 years, General Electric’s stock has effectively fallen in value at an average rate of 8.5%.
• The under-performance of GE’s stock can be primarily attributed to unfavorable acquisitions and a rather soft management as detailed below.

Understanding How GE’s Revenue Composition Has Changed Over The Years

• 2012-2014: Over these years revenue contribution was dominated by Power, Aviation and Healthcare, with each contributing approximately 15% of total revenues.
• 2015-2016: Acquisition of Alstom’s energy business helped Power segment’s contribution surge to 30% while strong performance of Aviation segment helped its contribution improve to over 20%. However, the contribution of Lightning business drastically declined to just 4% as energy efficiency regulations and market shifts away from traditional lighting products in favor of more energy-efficient, cost-saving options negatively impacted the demand for the company’s products.
• 2017-2018: General Electric acquired Baker Hughes in 2017, helping contribution of Oil & Gas increasing to 22% while operational issues in the Power segment dragged its contribution down to 26%.
• 2019-2022: Trefis expects contribution of Aviation segment to increase to 27% while Power segment is expected to slide to around 20%.

How Have Acquisitions And Divestments Impacted General Electric’s Performance Over The Last Decade?

GE Capital – The Elephant In The Room

• GE’s biggest mistake in the run-up to the recession was entering the financial industry. GE Capital became a huge liability during the financial crisis and in the aftermath of the recession. Investors were seen shying away from GE shares due to the high risk and volatility associated with GE Capital.
• General Electric decided to exit most of its GE Capital operations only in 2015, and restructured its portfolio as a pure industrial company. This exit plan war largely completed in 2017, and reduced GE’s total assets from $655 billion in 2014 to $309 billion in 2018.
• The delay in GE’s decision to exit GE Capital business played a big role in the company’s sub-par performance over the last decade.

GE’s Power Segment Grew Bigger, But Became Very Unprofitable

• Power segment has been the largest contributor to GE’s revenues over the years. In 2015, GE acquired its French competitor Alstom’s energy business for €12.4 billion – making it GE’s most expensive industrial acquisition ever.
• Although this acquisition boosted GE’s revenues, the Power business has been negatively impacted by operational issues since then. The operational issues coupled with Alstom’s low profitability dragged the segment’s EBITDA margin from around 27% in 2015 to just 3.5% in 2018.

GE’s Oil & Gas Segment Expansion Plans Also Ran Into Unexpected Issues

• In 2017, GE combined its oil and gas business with Baker Hughes Incorporated, and ended up with an ownership of 62.5% in the new company – Baker Hughes, a GE Company (BHGE). This transaction helped the company’s Oil and Gas revenues grow from $12.5 billion in 2016 to more than $21 billion in 2018.
• But General Electric acquired Baker Hughes at a time when the company’s oil & gas business was in turmoil and oil prices were declining. The acquisition negatively impacted the segment’s profitability, as the company failed to derive the cost synergies it was expecting from the acquisition. This led to the division’s EBITDA margin shrinking from around 21% in 2015 to 9% in 2018.

Finally, GE’s Swelling Leverage Ratio Is Also To Blame

• Leverage Ratio = Interest-Bearing Debt ÷ Shareholders Equity
• GE has an extremely elevated leverage ratio. The company has failed to control its debt balance and in fact, the proportion of interest-bearing debt to shareholders equity has increased sharply over the last couple of years due to the series of high-profile acquisitions.
• GE’s leverage ratio of 5x is roughly 3 times that of its industrial average.
• The increased risk introduced by the massive debt burden has also proven to be a major deterrent for investors.

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