GENERAL ELECTRIC CO

GENERAL ELECTRIC CO (GE) — Investment Memo

🐂 The Bull Case (Warren's voice)

• The Ultimate Aviation Tollbooth: GE does not just sell jet engines; they lease out critical infrastructure. Once a LEAP engine is bolted to a wing, the airline has effectively signed a 25-to-30-year contract to pay GE for parts, maintenance, and software. It is the most beautiful "razor-and-blade" model in the industrial world.
• The "Vanished" Test: If GE closed its doors tomorrow, global commercial aviation would grind to a halt within weeks. No other company has the regulatory certifications, proprietary engineering data, or specialized facilities required to keep their massive global fleet in the air.
• Exceptional, Concentrated Economics: By spinning off the distractions of Healthcare and Vernova, management has uncovered a diamond. A business with a 19.0% net margin and a 46.6% ROE is no longer a clumsy industrial conglomerate; it is a high-margin compounding machine disguised as an aerospace manufacturer.
• Unrivaled Pricing Power: Because safety and engine uptime are existential for airlines, GE can raise service prices to offset inflation without fearing customer churn. Their service contracts act as inflation-protected, volume-linked annuities.

🐻 The Bear Case (Charlie inverts)

• The Legacy Pension and Insurance Black Hole: You cannot easily erase a century of bad decisions. GE still carries $20.5B in debt, alongside a massive, opaque web of legacy pension obligations and runoff Long-Term Care (LTC) insurance liabilities. In insurance, tail liabilities have a nasty habit of turning out worse than even the most pessimistic accountants estimate.
• The Technological Guillotine: GE’s entire long-term valuation relies on the assumption that the world will burn kerosene to fly for the next 40 years. If there is a rapid, regulatory-driven pivot to hydrogen, advanced electric propulsion, or open-fan architectures where competitors leapfrog GE’s current turbine patents, the high-margin service backlog evaporates.
• The Illusion of Compounding: We must not mistake corporate amputation for organic growth. Revenue has plummeted from $119.5B to $45.9B since 2016. The eye-popping 46.6% ROE is largely a mirage caused by a hollowed-out equity base after years of multi-billion-dollar asset write-downs and restructuring charges.

💰 Valuation & Margin of Safety

• Intrinsic Value Estimate: $63.78 per share (based on a total firm value of $66.9B, assuming 3.0% FCF growth, a 10% discount rate, and a 3% terminal growth rate).
• 25% Margin of Safety Entry: $47.84 per share.
• 50% Margin of Safety Entry: $31.89 per share (where Buffett gets greedy).
• Current Assessment: The market is currently pricing GE as if its historical corporate sins have been completely forgiven and its aerospace segment will experience uninterrupted, smooth sailing. At current prices, we are being asked to pay a premium for a cyclical aerospace service business that still carries legacy balance-sheet risks.

Verdict: WATCH

GE has successfully transformed itself into an incredibly high-quality, wide-moat aerospace monopoly. However, the legacy insurance liabilities and the hollowing out of its equity base mean we require a steep discount to fair value before committing Berkshire's capital. We will keep our pencils sharp and wait patiently on the sidelines until the market offers us this premium business at a price of $47.84 or lower.