Even At $7, GE's Not Cheap

We figured that, by now, GE’s demolished stock must be screamingly cheap (because people were telling us it was cheap when it was $25).  So we looked at the numbers.  To our surprise, GE’s still not cheap.

Even in its shriveled state, GE is still trading at 17X trailing free cash flow.  In a rip-roaring bull market, that might be reasonable (might).  In today’s market, it’s startlingly expensive.

How do we get there?

At $7, GE has an equity market cap of $75 billion and net debt of $475 billion.  Add those together, and you get an enterprise value of $550 billion.  Last year, GE had free cash flow (operating cash flow less capital expenditures) of $32 billion.  $550 billion divided by $32 billion gets you 17X.

(True, finance businesses like GE Capital aren’t often viewed this way, but GE has some industrial operations, too.  And, ultimately, all that matters is to stakeholders is their share of the cash flow).

The other problem for GE is that that $32 billion of free cash flow is likely to shrink as GE Capital’s assets go bad and GE’s industrial profits get squeezed.  So GE’s valuation on normalized free cash flow (post-GE Capital-boom-years) might be even higher.

What would be a fair free cash flow multiple for a huge, mature company of this quality?  Probably about 10X. 

Unfortunately, to trade at 10X, GE’s enterprise value would have to get cut in half, to $300 billion.  And that would wipe stockholders out.


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