It's always interesting to see how companies handle a crisis. The gap between what managers should tell shareholders and what they actually say is always greatest when the news is truly dire. With that in mind, let's take a peek at GE's latest earnings announcement...
The headlines look great: "Equipment orders up 25%"... "GE business model performing well"... "Strong industrial cash flow"... And all of the numbers that the accountants can massage don't look too bad. Net income, for example – which is completely a product of accounting and totally meaningless both to real creditors and real equity holders – came in at $3 billion for the quarter and $11.2 billion for the year.
I can see an elderly retired couple that owns GE shares thinking, "Wow... that seems like a big pile of money. Maybe we should buy more shares." Someone was certainly impressed with the numbers: GE shares were up as much as 2.5% today.
But what about the serious challenges the company faces? Here's what GE CEO Jeffrey Immelt said: "During the difficult economy of 2009, we took a series of actions to improve GE so that we would be positioned for growth in the future. We have repositioned GE Capital to be safer and more focused. We have lowered our cost base and simplified our portfolio. At the same time, we grew GE R&D spend by 7%, expanded our product lines and made dynamic global investments. We are positioned to win in this environment."
When you see the CEO of a massively indebted company promising to "win", you know there are big problems ahead. There is no legal definition of the word "win." He is promising shareholders precisely nothing. And nothing is what we are sure they will get.
A few facts we didn't see highlighted anywhere in the company's 10-page press release "summary..." First, even though the company's accountants manufacture earnings, they were still down 19% from a year ago. That's because revenue dropped 10%. Immelt did admit earnings will remain flat in 2010 and 2011. What he didn't admit is the company is so horrendously indebted it cannot hope to ever return to honest profitability. Let me show you why...
At the end of 2009, GE had total debts of around $600 billion. But it only spent $18.8 billion in interest. That's pretty incredible, isn't it? That's only a 3.1% interest rate. Keep in mind that in 2008, when GE had roughly the same amount of debt, it spent $26.2 billion in interest. How did GE cut its interest expenses by almost $8 billion?
What's not mentioned anywhere in GE's press release is the company would have gone out of business last year had the government not stepped in to guarantee all of its debts. That guarantee allowed GE to save roughly $8 billion to $10 billion in interest expense this year – about twice the amount of money it recorded as "profits." These guarantees all expire in June 2012. And what will happen then? Is GE really making any money today? Is there any way it will ever be able to pay off these debts?
We believe the answer is: No chance. Consider these facts... Based strictly on today's number, Egan-Jones, the only dependable credit-ratings firm, upgraded GE's debt to A from A-. But that's still just two notches above junk. Just to be very conservative, let's pretend GE is still an investment-grade credit. In that case, GE should be paying around 8% on its long-term debts, which are roughly $500 billion. So soon, GE should see its interest expenses double, from around $20 billion to more than $40 billion. And keep this in mind: The firm only earned $29 billion in operating income for 2009. So assuming it forgoes all of its other operating expenses – like capital investment and repairs – it would still go bankrupt.
On the other end of the spectrum, one of the best operating companies in the world, McDonald's, announced blockbuster earnings. The company earned $1.22 billion, up 23% from a year ago. And revenue increased 7% to $5.97 billion. Plus, cost-cutting initiatives, like the introduction of a $1 breakfast menu, haven't hurt the company. Operating margins actually improved 30.6% from 27% – a "pretty rare occurrence" in the fast-food industry, according to one Goldman Sachs analyst. Same-store sales – sales at restaurants open at least 13 months – increased 2.3% globally. McDonald's hasn't seen a quarterly drop in global same-store sales since early 2003. And while GE cut its dividend last year, McDonald's returned $5.1 billion to shareholders through dividends and buybacks – approximately 8% of its current market cap.
Our newest advisory service, Penny Stock Specialist, is officially available to Digest readers today. Editor Frank Curzio has been analyzing stocks for 15 years. But he found his niche 10 years ago and made his career picking stocks that trade for less than $10 a share. And his track record is spectacular. Take a look at some of Frank's biggest winners since 2006:
| Company | Return |
| Ashland | 488% |
| Yamana Gold | 204% |
| IMAX | 325% |
| McDermott | 143% |
| Massey Energy | 342% |
Frank didn't pick a single loser in 2009 – a year the S&P 500 fell as much as 28%. Although his track record is already impressive, Frank's latest recommendation – the stock we told you about yesterday – promises to be his biggest winner to date. When word gets out about this company, which recently landed a huge contract with one of the world's leading tech firms, shares will soar. So why do we know about this small stock when nobody else does?
One of Frank's contacts is plugged into the technology world. He actually makes a living taking apart, piece by piece, the newest electronic equipment on the market. He then studies every part to determine which company manufactures it. He can tell you, for example, which manufacturers supplied the different components that make up a Dell computer.
Recently, Frank's contact was disassembling one of the hottest products on the market. He noticed the manufacturer of one of this product's most important components had changed. He did some research and discovered this new company had just signed a giant contract with the manufacturing firm... a contract that could cause shares of this small company to soar. Frank expects early investors could more than triple their money in one year. The earlier you get into this stock, the better. To be among the first in the market to learn the identity of this small technology firm, click here...
A special note for traders... After a long period of waiting for volatility to return to the stock market, there was a big volatility spike yesterday, courtesy of Comrade OBAMA!'s speech. In my service, the Put Strategy Report, we took our first steps back into the options market, selling puts on a particular blue-chip stock. If nothing much happens, we'll double our money on the position over the next 12 months. But if the market snaps back quickly, we could make 50% or so in the next 10 days. Either way, it's almost impossible for us to lose money on the trade. If you're interested in these kinds of super-safe options trades (we sell options, we rarely buy them), please check out my personal trading service, Put Strategy Report. To learn more, click here.
New highs: Burlington Northern Santa Fe (BNI), Berkshire Hathaway (BRK-A).
In the mailbag: Any scientists want to weigh in on the sound of real gold? Send your best gold-proofing idea: feedback@stansberryresearch.com.
"Regarding The Digest response about how to verify that your gold coins are what they are supposed to be let me propose a theory inspired by my musical background (you may ask one of your reader who's a physicist to verify the science); In theory, a bar of pure gold rigged into some sort of xylophone key setting or suspended chime, when hit with a mallet, would give a different sound as opposed to a same size bar of gold-covered tungsten. In the same way a gold coin spinned on a table will give a totaly different ring from a same size copper coin, for exemple.
"The speed of sound for gold is:2030 m/sec. As for tungsten, it is: 4620 m/sec.
"Now, I'm no expert(but the wife is a chemist) and I would be interested into having some phycisist insight on the subject. Just my two cents worth." – Paid-up subscriber Stéphan Dubé
Regards,
Porter Stansberry and Sean Goldsmith
Miami Beach, Florida and Baltimore, Maryland
January 22, 2010What GE didn't mention... Launching Penny Stock Specialist... Why I'm selling puts again... What gold sounds like...