GENERAL ELECTRIC CO (GE) — Investment Memo

🐂 The Bull Case (Warren's voice)

• Why the moat is durable and compounds: Airframes are married to engines for 20–30 years. Switching costs are absolute—certification takes years, GE owns the IP and tooling. Every widebody delivered today locks in a 30-year stream of aftermarket cash flows. As the fleet ages, service revenue grows without new capital. The moat widens with every engine sold.
• The economics are exceptional: Aftermarket margins are 40–50% (implied by 19% overall EBIT on a mix that includes low-margin engine sales). Once the install base is large, incremental service revenue drops straight to profit. This is the razor/blade model with a monopoly on the blades.
• At what price does this become attractive? If the legacy balance sheet were clean (no insurance liabilities, no GE Capital debt), the engine business alone would be worth $80–100 per share (10x normal EBIT of $8–10B). But we cannot ignore the corpse in the basement. A genuine purchase price would need to compensate for the $20.5B debt and $10B+ long-term care time bomb. That means a market cap below $55B (~$50 per share) offers real margin of safety—buying the engine franchise for the price of its clean assets, with the legacy drain priced in.

🐻 The Bear Case (Charlie inverts)

"Show me where I'll die and I won't go there."

2–3 permanent impairment scenarios:

1. The $10B+ long-term care insurance claim surge
   GE’s run-off insurance portfolio (legacy GE Capital) is a black box. If interest rates stay elevated or morbidity assumptions prove wrong, the required reserve top-ups could exceed $5B annually—enough to consume all of GE’s FCF for years. The engine business would become a cash drain to feed a dead insurance unit. This is the most likely permanent impairment over 5–10 years.

2. Technological disruption bypassing the certification wall
   Hydrogen combustion or open-fan architectures that are not compatible with GE’s current installed base could break the service monopoly. A better-capitalized competitor (e.g., Rolls-Royce, Pratt & Whitney, or a state-backed Chinese player) winning the next narrowbody cycle would shrink GE’s widebody stronghold. This is a 15–20 year threat, but structurally fatal.

3. Capital allocation suicide from a hidden FCF crisis
   Management stopped reporting free cash flow the moment NI turned positive. If FCF is truly negative or near-zero (cash conversion ratio < 50%), then the $20.5B debt is not serviceable without asset sales. A dividend cut or debt restructuring would wipe out equity value overnight. This could happen within 2–3 years if service revenue disappoints.

💰 Valuation & Margin of Safety

Reacting to the DCF estimate of $63.78 per share:

• Intrinsic value estimate: $50 per share — Discounting the DCF by a 15% cost of equity (to reflect the balance sheet risk and FCF opacity) and subtracting $10B for off-balance-sheet insurance liabilities. The clean engine business is worth ~$60, the legacy debt and insurance subtract ~$10.
• 25% margin of safety entry: $37.50 per share — A price that assumes the engine moat is real but the legacy liabilities are a permanent 30% drag. Conservative, not paranoid.
• 50% margin of safety entry: $25 per share — Buffett’s ideal: buy the engine franchise for the price of its net tangible assets (which are ~$18B equity plus $5B intangibles), ignoring all goodwill. Only if the market panics on a GE Capital lawsuit.

Current price vs. intrinsic: At ~$60–70 per share (recent trading range), GE is fair to slightly overvalued — the market is pricing in a clean exit from legacy liabilities that likely won’t happen. No margin of safety.

Verdict: PASS

The engine moat is genuine and widening, but management’s decision to stop reporting free cash flow is a confession that cash conversion is rotten, and the $10B+ long-term care insurance bomb makes this a balance-sheet gamble, not an investment. Berkshire can wait for better operators (e.g., a spin-off of the insurance runoff) or a panic price below $40 — until then, the risks outweigh the returns.