We’re sorry that we go on each week about some aspect of GE, but it is critical to the ability of the US to benefit from renewables at the manufacturing level. There are US financial companies and some US utilities which benefit from renewables, but GE is the only global class equipment manufacturer that seems to be able to do the same. Of course if you count distributed solar, there are perhaps 3 or 4 others that make waves in the US, but here we are thinking about grid scale activity.
If GE drops out of the renewables race, which we said after the latest results CEO Larry Culp is clearly not considering, then we see little good on GE’s horizon and nothing more for us to write about.
GE has its detractors and the biggest of them is JPMorgan research analyst Stephen Tusa, who says that it must shed 40% more of its value before he would recommend buying shares. But Tusa has just been joined by a second critic, and one that carries a significant amount of weight – Harry Markopolos, described alternatively as a forensic accountant, and the man that first discovered that Bernie Madoff was running a Ponzi scheme.
He reaches that same 40% discount as Tusa, but puts it down not just to sales performance, but instead suggests that “unconventional” accounting in its financial filings, on the edge of being fraudulent, and suggests that the financial arm is not holding enough cash to cover its downside, and that the oil and gas business is doing far less well than everyone believes.
The nice things we said about its renewables division a few weeks back was due to simply believing the numbers that it produced. It they are in any way exaggerated then we withdraw that positivity.
On the one hand we pointed out that being in conventional airplane and the gas business was tough long term, but that as long as it was serious about renewables that it would eventually turn the corner. Its order book for wind turbines was shown as swelling considerably, suggesting that the gamble with its Haliade-X was paying off. Power was down 22% as reported, but Grid Solutions and Renewables were up 25% with onshore wind up 87%.
But Markopolos claims that GE has masked its problems, using fraudulent filings and points to GE’s insurance unit needing $18.5 billion in cash and the entire company having accounting issues to the tune of $38 billion which equates to 40% of its value which would take it down to the $5 level (it is $9 now) that Tusa has been proposing.
GE of course says its numbers are fine, but Tusa has already mentioned that the 4.5 gigawatt gas order book that GE cited in its Q2 numbers had two orders that it had already reported before. Instead it should be showing just 1 GW of gas and power orders, and that would leave it behind rivals in the market and a rapidly declining market share.
Markopolos is a legend in US stock market circles, and he spotted the Madoff Ponzi scheme for what it was almost a decade before anyone else finally found evidence. And he did it all by analyzing public statements which he found could not be true. Since then he speaks rarely and when he does, the market listens. So naturally the GE stock has hit the skids almost the moment Markopolos spoke up, off 7% already. The fact that he was quoted in the Wall Street Journal, may also account for that rapid fall.
The GE price is now likely to fall to that kind of level, and hopefully Culp will be able to remain in place and see through the transformation, but he may need more cash in the operation and if he is tempted to smarten up the renewables division for sale, then expect the worst in the longer term. After an 11% overnight fall, GE recovered 6.5%.