Tim McElvaine Sums Up His Investment Thesis on GE

General Electric, shunned by the investment community, has registered on the radar screens of a few value-oriented investors whom we deeply respect.

On August 9th, MOI Global member and Peter Cundill protege Tim McElvaine, founder and president of McElvaine Investment Management, posted a video explaining why the fund he manages recently bought shares of GE.

Watch the video below or on the website of The McElvaine Investment Trust:

Interested in further context on the GE turnaround?

Consider what MOI Global instructor Glenn Surowiec, portfolio manager of GDS Investments, wrote in his letter to investors in July:

… a cornerstone of successful investing is the ability to look ahead without dwelling on past mistakes. As present-day General Electric investors, we are buying into the future of the company, and not the past. In our 2017 Year-End Letter, we commented upon the appointment of new CEO John Flannery and looked ahead with our expectation that Mr. Flannery would reverse General Electric’s well-documented recent troubles by restructuring the company’s non-core businesses. That expectation is now reality.

On April 26, 2018, The Wall Street Journal reported that General Electric turned down an offer from Danaher Corporation (NYSE: DHR) to purchase General Electric’s Life Sciences unit at a price in the $20B range. That unit generates approximately one-quarter of GE Healthcare’s total sales, and General Electric’s refusal to sell in the stated price range speaks volumes about the value which the company places on Life Sciences. Further cementing that valuation is the fact that Siemens AG (FWB: SIE) recently spun-off its medical imaging and diagnostics division (Healthineers) for $35B. If the same valuation metrics which were applied to Healthineers were applied to GE Healthcare, General Electric shareholders could realize more than $60B from a spinoff of that unit . . . a spin-off which we expect will be completed within the next 12 to 18 months.

General Electric will soon close on a transaction to merge the transportation business component of GE Aviation with Wabtec Corporation (NYSE: WAB). In that $11B deal, General Electric will realize nearly $3B in cash while its shareholders will own 40.2% of the new company. The structure of that transaction will bring significant advantages while allowing General Electric, under Mr. Flannery’s leadership, to continue to optimize its portfolio of businesses.

We expect that optimization will include (A) General Electric’s sale of its gas engine business to private equity firm Advent International for $3B, (B) the company’s sale of its 62.5% stake in Baker Hughes (NYSE: BHGE) over the next 36 months, and (C) as noted, the spin-off of GE Healthcare.

The General Electric turnaround will not be quick, and it will require a healthy dose of the patience about which we wrote in our 2017 Year-End Letter. We remain confident, though, that patience will be well-rewarded.

Replay Glenn Surowiec’s session on GE at Best Ideas 2018.