I usually don't write on the same stock two days in a row. Today however, I will make an exception. The General Electric (GE - Get Report) third quarter earnings release this morning, and the information around those earnings can simply be described as ugly. No nice way to say it. The firm reported adjusted EPS of $0.14, which was a nasty miss. Revenue printed at $29.6 billion, which was also light. These misses were not the news of the day. If this is your first exposure to this information, go get yourself a glass of water. I'll wait here.
Okay, let's proceed. In CEO Larry Culp's defense, at the time of his taking the helm for this name, the firm did warn that the Power segment would cause a significant full year miss of the firm's target for free cash flow, and that these problems could persist longer than previously expected.
1) GE did cut the dividend by 91.6%. Yes, that 12 cents quarterly dividend is now just a penny, which will save the firm a rough $3.9 billion annually starting next year. Why bother with a penny?
2) The firm needed to take a $22 billion "before tax" goodwill impairment charge related to power. What that tells me is that somebody somewhere made a really huge error. A really, really huge error.
3) The firm also revealed that the Department of Justice had opened an investigation, along with the SEC (The SEC also expanded the scope of their investigation.) into the firm's recent accounting practices tied to the Power unit.
4) Speaking of Power... that segment of the firm experienced a 33% decline in revenue, and will now be broken into two units. One will focus on gas products and services, the other on Grid Solutions, Nuclear,and Power conversions. Among other segments, Transportation also went through a decline, while only really Aviation impressed.
From The Conference Call:
"We have no plans for an equity raise"
"We are not offering updated guidance right now."
"We have our $20 billion disposition plan in motion."
"Over time, Baker Hughes and Healthcare may become independent, as well as planned sales in Aviation, and Transportation."
Trading General Electric
Should this morning's low actually be the short to medium term low, this name presents as possibly plagued by several layers of nearby levels of probable resistance. I don't like investing in names under investigation. I don't like investing in names that are heavily invested in by the public, especially when that public may not altogether realize just yet that the dividend has been obliterated.
Lastly, JP Morgan's Stephen Tusa is in my opinion, simply the most accurate analyst on the street in this name, and we have not yet heard his take.
Trade Idea, If You Must (minimal lots):
Keep in mind that the firm will report their fourth quarter roughly three weeks into January 2019.
-Purchase one January $12 call (last: $0.50)
-Sell one January $10 put (last: $0.30)
These options trades will cost the trader a net debit of $0.20.
The stock takes off... the trader owns 100 shares at a net basis of 12.20.
The stock is sent to Hades... the trader owns 100 shares at a net basis of 10.20.
The stock remains between $10 and $12 for three months... the trader is out 20 bucks.