Why GE Is Still a Good Short

Why are we so negative on GE now?

We note that GE remains highly leveraged as of 31 March 2009 and strongly suspect that the finance businesses need more conservative provisions, more equity capital and less debt.

From the GE 10-K for 2008 (Dollars in millions) 2006 2007 2008 Total Revenues GE 128,280 145,876 163,374 Less: GECS 61,351 71,936 71,287 "GED" 66,929 73,940 92,087 Pretax, Pre-Minority Income GE 24,150 27,528 19,782 Less: GECS 11,849 13,987 5,630 "GED" 12,301 13,541 14,152 "Pretax" Margin GE 18.8% 18.9% 12.1% Less: GECS 19.3% 19.4% 7.9% "GED" 18.4% 18.3% 15.4% Cash-Continuing Operations GE 32,512 39,942 47,841 Less: GECS 21,579 25,015 31,204 "GED" 10,933 14,927 16,637 "CCO" Margin GE 25.3% 27.4% 29.3% Less: GECS 35.2% 34.8% 43.8% "GED" 16.3% 20.2% 18.1% Property Additions GE (15,788) (17,803) (16,010) Less: GECS (13,168) (15,217) (13,321) "GED" (2,620) (2,586) (2,689) Property Dispositions GE 6,795 8,457 10,975 Less: GECS 6,795 8,457 10,975 "GED" - - - All other Investing GE (6,053) (9,910) 195 Less: GECS (5,995) (8,730) 5,979 "GED" (58) (1,180) (5,784) "Free Cash Flow" GE 17,466 20,686 43,001 Less: GECS 9,211 9,525 34,837 "GED" 8,255 11,161 8,164 "FCF" Margin GE 13.6% 14.2% 26.3% Less: GECS 15.0% 13.2% 48.9% "GED" 12.3% 15.1% 8.9% Source: Newport Value Partners

We also believe the company has limited capacity outside its finance business to find permanent private capital.

A Look at GE Debt GE GECS "GED" Short-term debt 176,320 175,676 644 Long-term debt 327,658 317,412 10,246 Total Debt (TD) 503,978 493,088 10,890 Less: Cash and equivalents 46,830 45,240 1,590 Net Debt (ND) 457,148 447,848 9,300 Total GE Shareowners' Equity 101,019 60,756 40,263 Less: Goodwill 80,640 24,437 56,203 Less: Other intangibles 14,758 3,416 11,342 Subtotal 5,621 32,903 (27,282) Less: Preferred Shares 3,000 - 3,000 Tangible Common Equity (TCE) 2,621 32,903 (30,282) TD/TCE (X) 192.3 15.0 (0.4) ND/TCE (X) 174.4 13.6 (0.3) Source: Newport Value Partners

Like others, we will wait to read GE's second quarter results with keen interest. But we believe the company is significantly undercapitalized and question how closely and effectively this company has been monitored by the board of directors and regulated inside the U.S. and in the many countries where it operates. It is never easy to raise capital, but experience in the "new financial world" that started around Sept. 15, 2008, has shown just how hard existing shareholders can get punished when overleveraged companies exhaust private sources of capital and reach out for extraordinary government support, under the harsh light of public scrutiny.

The author and his firm have no positions in General Electric stock.