Jeff Sprague Says He Hasn't Had a Positive Rating on GE Since 2008

with us, and let's begin with that. With this news about General Electric, what it says to you about the company itself or industrials in particular. What we're seeing here with this reimagining of our reinvention of General Electric, Well, look, I think the General Electric almost defined the manufacturing age for the United States and that we are now moving into a world of increasing focus on services and information and they need to pivot into that new world ahead

if they're going to survive. And this isn't an example of the kind of renting transformations that have to happen if companies want to try to succeed. It's not an easy transformation to execute. Are we seeing a move forward here or a move backward. In other words, are we seeing a return to two general electrics roots, a paring down of the expansion that we've seen here over the

last few years. Well, ironically in some ways yes, because they're going to have to focus on some of the businesses where they will have a sustainable edge as a service provider, and and where are they in predicting where do you see this company fitting and going forward? I know that there was some word last week about the calls for the death of the conglomerate. Are we seeing that here? Is that what this portends. I don't necessarily

think it's the death of the conglomerate per se. I think it's shifting from a focus on making things like aircraft engines that you sell to somebody else who then is responsible for them, to becoming a provider of aircraft engine hours services that you meeter out for your users, where you still maintain the engine and are responsible for it. And of course the challenges that's a very big change.

The skills that are required are different, and at the end of the day, it creates efficiencies for the system and that actually shrinks the size of the market. I just want to get your perspective before I moved to to a broader theme here, just about the the import of this, How how big a deal this is? As I mentioned, John Flannery is still relatively new to the job, scheduled to outline radical changes to the companies have just

been discussing how big a deal is this? Just contextualize the moment for us, if you would, Well, I think in the context of the US economy, it's a it's important, but it's a modest deal because g is a large employer, but it's a tiny percentage of the US labor force. I think symbolically though, it does highlight a passing of the baton from great manufacturing being the defining characteristic of the United States to now being a smaller and smaller portion of GDP, just the same way that once upon

a time we were an agricultural country too. Um, those phase changes are very wrenching and and challenging, but we've gone through them and the challenges to do that again. Context there about the company. Let me ask you for some context about this moment in particularly back in in two thousand and twelve forecast we'd see down twenty thousand. Here we are at now twenty two what do you make of of where we are? Just from a broad market perspective, I think where we are reflects the fact

that corporate earnings have been very strong. They're growing at about ten percent this year, their forecast to grow at about the same it's not actually slightly more next year,

which we'll see. Uh. And actually growth outside the US in corporate earnings is even faster than that, And that's partly because the economy continues to grow at a nice clip, somewhere between two and a half and three in real terms, plus we'll call it a dollop of inflation, so that's about four and a half to five percent nominal growth. And companies have been buying back shares, which means that

earnings per share can grow even faster. This just in David jeff Emil to coach the New York Jeffy at some point, maybe they will. That would be good. I mean, there was a nice football player second he could get it done. Flords Angels is funny. Good morning everyone, Stepmasters. You know, I look at this and I guess, going back to the import of g E, everybody's got to move faster today. I mean I made a theme of this three four or five years ago Davos, where the

new five year plan is three years. How much time does a guy like Flannery have, not specifically ge, but in general corporate officers it's like a one year two year time horizon now right. It's true, it's it's harder to get investors to be patient for more than a couple of years because their time horizon has shrunk. But on top of that, the pace of the economy as a whole is also accelerating, because if you fall asleep for one product cycle, you can really lose your business.

And that was not true twenty or thirty years ago. So it's a much less forgiving environment for companies. You just can't make mistakes. How close are you watching what's what's unfolding? And watched in DC? The present making his way back from Asia over these next few hours, he'll be created by some political controversy on Capital Hill, of course, but also just the latest on this taxiform writing process. How much does that matter to you? How much does

it matter the markets right now? How all of this is sorted out here over these next few weeks. Of course, it matters if there is a tax cut, and it's really about tax cuts that we're talking now. Um, then in the short run, people might think that that's good for corporations, but that's a one time benefit if it

if it materializes. In the longer run, a big tax cut means much bigger deficits, and that will probably translate into not only more interest rate rises, but actually the need over the next few years to have a tax height to catch back up with those deficits. So I

think that there's a lot of concern about that. The other thing I mentioned, and it's not on people's radar screens yet, but we're only about three weeks away from the whole that ceiling and and and and that that issue is going to be very gnarly, and given the timing, may very well interact with this whole tax cut discussion. I think that that is going to be a very messy process, different than it has been in the past.

I mean, it becomes so inured to these short term spending bills and short term increases of the DEAT ceiling. What's going to make this one different? Do you think? Well? I think that some of the problems are really intractable because the Republicans at this point are really committed to a tax cut. They've made that their litmus test, but that actually interferes with a lot of their own program and exactly how they square the circle. I don't know

scare the circle? Are you concerned, as a finance investment guy with the build out of our deficit in debt? I got all the econ guys saying no, it's no big deal. You know we're not there yet, but I just don't buy it. Well, it depends on exactly how you build the debt and what you do with it.

So if you think about the tax cut that's currently on the table, it's fairly large, and the problem is it's unlikely to produce a lot of demand growth because the corporate tax cut isn't really focused on the kinds of investments spend that could actually perhaps create more growth, and the personal tax cut is focused mostly very wealthy people whose propensity to consume isn't going to change much as a result of the tax cuts. So in both cases you're not gonna get a lot of demand growth,

and that isn't good. If you wanted to design a tax reform that was more likely to produce growth, you could have done it, but that's not on the table anymore, Seth. Thank you so much. Seth masters with us formerly will they be Bernstein wonderful perspective on growth and value on uh this bullmarkt David, did you did you go to cash this weekend? Did you? I'm in the triple leverage doll cash for so it's hard to get any more leveraged. You know, and do it, John Tucker, don't look at

me like that. I'm making one and a half percent a year because I'm leveraged. I was doing the calculations for they do tre you. This is for another four acrears of New Jersey swamp. I'm moving into John McQuary's basement. Very good, very good, but yeah, I mean, I mean we make jokes about it. But you know, unlike the rest of us, Well, I can't afford to live local, John Tucker, You're live in Salt right, yeah. Um, And it's it's gonna be a big impact if they get

rid of state local deductions. Just love mentioning Tucker by the fire doing his tax calculations. You and Biscuit, I mean, h and are blocked for you, right, it was not happy. Your texture turns like about four pages five pages the way you lie. And I told the kids, I'm gonna have to get I'm gonna have to let one of them go. Good. That's where I was this week, and

all very good. Kevin's really will be with us through the week as we go, really an important week here, seth masters is going Jesus, maybe I should move to Jersey. That would be a good good, Oh it will be. We're laughing for those of you on the nation. We are laughing in New York and New Jersey and Connecticut, and we say good morning, Bluebird nine sixty the Bay Area in California, because our taxes are going down, John,

some of us n Westinghouse disappeared. It was renamed the CBS Corporation, and of course there was Viacom in there in it was ancient history. How about this headline on General Electric bracing for Monday with the Westinghouse. Jeffrey Sprague is with Vertical Research Partners. Is Mr Flannery doing the ghost of Westinghouse? Mr Sprague, Well, I think he's going to try to avoid that ultimate fate and leave us

with something that's left that's called General Electric. But the company is going to end up much smaller than it is today. And you know, obviously it's it's the less stock left in the original down Jones Industrial average, and it's not written anywhere on a stone that it has to be there forever. Um, what's the organic re a new growth that could be generated off the announcements that you see today. Can you get back to high single

digit Can he actually do a double digit revenue growth? Uh? No, I think that's completely out of the question in the near term. I think, uh for the next two or three, maybe four years, there's gonna be a lot of pressure in this power business. And you know, it looks like the way they were shaping the portfolio, that would be

a good third of the portfolio. So I think there's gonna be a you know, a fight here to generate you know, low single digit organic growth and ultimately maybe you can normalize it the mid singles looking at maybe three years or so. One of the great realizations Jeff is I use the c FA Institute curriculum three courses here, there's somewhere in the middle of the second level two where the clouds part, you realize the biggest mistake is

what you thought were variable costs are fixed. Costs. Does he have the variable cost structure to play with to reduce costs this morning, He's got a lot of fixed costs to deal with. You. No, it's this is not an easy variable cost equation. And you know, we're looking at the company having spent upwards of twelve billion dollars on restructuring and other charges and actions here over the last three or four years, and we still have profits

under pressure and cash under pressure. So there's I think they're behind the curve. And I think the other thing Tom that's that's relevant is a lot of this is a symptom of just deflationary pressures and some of their big markets like power, right, so when prices going down in a big multibillion dollar market, it's it's hard to get out of that. David, this is my theme for two thousand and eighteen. I haven't announced it yet, but let's sort of have to do it here with Mr

Sprague pricing power. We're back to Jack Welch. We're pricing power and deflationary pressures are tangible. Jeff, what can we learn from what? What do The CEO of Siemens said last week about conglomerates, He declaring them them dead. Is this further confirmation of that as you see in Well, I think it is. It doesn't mean that we're gonna distill ourselves down to a bunch of mono line companies. I think it's very incumbent on these more diversified companies

to have a focused diversity. If that's not an oxymoron, right, But you know, focus on the two or three or maybe four things that you can really do well and be on top of because there's just there's not room for mediocrity in this business world and any any business line. You know, things are moving so quickly, so you know you're if you're a conglomerate, you need to be lean and nimble and on top of the trends in these businesses or you get disrupted very very quickly. What's gonna

happen to this, Baker Hughes Steak. I gather we're not going to hear much about that today, for at least from what I've seen that reported. But that's certainly something that John Flannery has got to be taken a look at. Yes, since it already trades. I think what we'll see is at some point there will be a split off of the asset as opposed to a spin. So in a split, GE shareholders canna leok to swap their GE shares for Baker. This is what they did with Synchrony, the consumer finance

business when they separated that a few years ago. Um, you know, they also did pull some cash out of Baker, you know, a couple of weeks I guess about a week ago with the share of purchase announcement. So I think they'll try to pull a little bit of cash out of it here in the near term, but then ultimately the st will be separated, likely in a split off.

What happens to research and design going forward? This is a company that has been for so many years so innovative, and if we see cost cuts to that, to research and development centeres around the world, what's that going to mean for gees future. Well, I think it's going to still be a very important part of what they do.

And you know what I'm hearing sounds like it could make sense right to push that really more into the divisions, to make sure the company is investing on investing in things that really have you know, a commercial driver for them, right, and be careful with the blue sky stuff. The blue sky stuff. This is fine maybe around the edges, but you really want to be investing for the customers need and a clear vision of the future. What is your sign? Jeff?

As we've said, you've been more than anyone I know, just dead on in your questioning of the income statement. What does it take for you to be by You've got a price target at twenty? What does he need to say? Where you go? WHOA, they've drunk in the kool aid. Let's go well, you know, I like part of what I'm hearing, just a simplification I think is very very important. Uh. The thing that weighs against that,

in my mind, Tom, is where you started. One of your questions is just how do how and where do we grow from here? And that's really ultimately going to be what swings my opinion on the stock and whether it's today or six months from now when I you know, watch what they do and what they say. But really I think we have some kind of base being established here today and the question is can we grow off that? And how do we capitalize that growth? How? How did

we get here? Was it accounting dreams and hopes? Do you blame quote unquote blame Mr Immel. Was it just the times? What's the negative look back that you have? Who do you? Who do you? I guess fault? Well, you know, ultimately you do have to fault Mr mL who was the chairman of the company and the board.

I think the the ultimate uh, you know, the main reason we got here, if I just still it down into a single factor, it's just poor capital deployment, right, I mean they were just chasing too many things, buying businesses high, selling them low um and the cumultive effect of that mismanagement of capital just destroys value. And I can remember over the years, you know, they would do something that didn't look too great and people would defend it and say, oh, it's only a billion billion dollars.

I mean, that's that's chump change for ge. Well, you know for anybody, you know, a billion here, a billionaire. It starts to add up, right, And the chumultive effective of poor investment decisions, particularly in M and A. I think really it brought us to this point. How much time are you giving this new CEO to to implement all of this? In other words, we're gonna get the outline today. It sounds like there'll be some intricacy to it. How much time are you and others prepared to give

this company turn things around? Well, you know, I don't. I don't determine, you know, how long he stays on the pay roll or anything like that, Right, I mean, it's it's gonna be my role to you know, try to be a fair judge of what he's doing and and determine if if there's an investment case here for my clients. Uh, I want to give him the benefit of the doubt. I mean, actually have not had a

positive rating on GE since early oh eight. I downgraded it, uh in that Bear Stearns quarter if you recall Q one of oh eight and have never come back. So uh, you know it's uh, you know, it's we'll see, We'll see what he does. Okay. I'm looking at the financial analyst screen in the Bloomberg, the f A screen. This is GE Equity f A. For those of the terminal in John and the Hummer. Do you have the terminal with two or four screens in the front seat. Oh,

I've got the four screens. I wanted to be sure you've got that, Jeff, I got but at which is very industrial even if they downsize a coup Beny, can he stun people to come out with a boosted ibadal margin today? Or is the is the pricing up tops a week? He can't pull that rabbit out of the head. I think, I don't. I'm not expecting an explicit EVA don margin forecast today, but that's going to be the premise of where they're going to head with this today.

Is this cost cuts and improve profitable profitability? Right and uh And that's really where the decision point is going to be. I mean, you know, as analysts, we have to be very careful about you know, gross actions versus you know, the next bottom line and the net to the bottom line. Has been very challenging with what's going on in these markets. Well, very quickly here Karen l. Lark didn't help me here. She said it was too squishy. Maybe you can be more exact. Two Hildren twenty nine

thousand bodies. How many go out the door in the next thirty six months? Boy, I don't know. I would say probably upwards the ten percent of that count. Yeah, okay, well, yeah, it doesn't do it. We have to quote you worldwide Blue John Tucker help me here, Jeff Sprague twenty or thirty thousand, you can be in that vicinity next thirty six months. You see the silence that we got him. Okay, we'll take the silence is at Jeff Sprigg, thank you

so much for the vertical research. I'm kidding, of course, Vicinity, John V, I, C I, Jeff Sbrigg, He's been wonderful on General Electric. We really enjoy having Jeff Spregg come on with us on General Electric. There is a firestorm of analysis. Tax Policy Center, Urban Institute of Brookings Institution, preliminary distributional analysis of the tax cuts and job back over the center and budget and policy priorities. Sharon Parent writing up Senate tax bill his same basic flaw as

his house built. Jared bernstein enjoins us. He's the only one that's read five reports, six reports on all this. Of course, he is acclaimed in economics and I would suggest has a liberal bent. He studied under Vice President Biden over the last eight years. Jared, what do you make of this? And I think over the weekend. To me, the critical issue is is the comparing contrast with six or is it with early Bush? The younger tax reform? What what kind of tax bill do we have. That's

a great way to tee up the analysis. It's very much the latter, very much in the spirit of the Bush too. And the key factor that informs that judgment is the fact that tax reform was revenue neutral. Uh, this reform loses at least one and a half trillion. That's not me talking, that's the Republicans themselves. They wrote one and a half trillion increase in the in the in the ten year deficit numbers into their bill. That's

the leeway they've given themselves. And I think one of the frustrating things for many people who are following the debate is they sometimes these folks pose as uistical hawks, but they're looking more like cistical chicken hawks. And that's a problem. Jared, let me ask you how much we know about these two pieces of legislation. One is in co with the one before the Senate Finance Committee, is not a fully fleshed out draft. We do have a draft from the House Ways and Means Committee with some

amendments attached to it. I look at what's happened here over these last few weeks. The Tax Policy Center having to issue mea culpa is it does some analysis of that legislation. Then we see the Tax Foundation doing the same thing. So both of these institutions trying to get a read on what's in this legislation and what it means. How much do we know? And how difficult is it to feel all knowing? Here as we move at such a break Nick nick neckclip here to thanks living into Christmas.

Another important and piercing question. Um, we actually know quite a bit about the legislation, about the proposal it self, especially in the House where we've got four hundred pages of tax changes largely cut. I think the thing that we don't know, and where you see the dueling models causing some trouble in my view, is that people have all kinds of ideas about dynamics of such models. How much will will they pay for themselves? How much economic

growth will they generate to offset their cost? And if you're someone who supports the plan, you're naturally going to be attracted to a model that I would do as as pretty heavily juiced in that regard. So you'll you'll find a model. But as all this is going to unleash tremendous growth. But if you dig into the assumptions of those models, you'll find it historically that just hasn't been the case. Tax cuts, I'm not saying they never pay for some portion of themselves, but it tends to

be quite small. Let me ask you just for for your perspective on on where we go from from here. Uh, it looks like there are still some fairly big issues that need to be hammered out here This week, next week, are for many weeks that it takes. The longer this takes is it's does it does it less in the likelihood that we're going to see a piece of legislation passed. Yes. I would say that one thing the Republicans learned from

the healthcare debate is the time is their enemy. The more that sits out there, the more people are going to fight over the some of the changes, some of the pay for is that doing various groups who benefited from the ductors that they're taking away, you know, Jared quickly or we've got to get the sub general electric catalyst Paul Krugman I thought was brilliant over the weekend and truly as wheelhouse, which is international economics and complex

dynamics is the fault of the politicians and no fault of theirs. But it's just the reality that they're doing a domestic, close border, closed economy analysis, and the reality is we're working in a massive, wide, open international economy. That's really important, especially regarding that last comments I made about the dynamics, because the way you get the juice models in the big growth effects by assuming really strong couple flows into this country, and the models discount the

impact of that on trade deficits. So a much more realistic view would show that no, they're not gonna come anywhere close to paying for all but a fraction of their thoughts. Never enough time. Jared Versity, thank you so much, greatly appreciate your work. He of course the senior fellow Center and Budget and Policy Priorities. Why don't you bring in our next victim uh In merger Derby, Yes, merger Derby, Daham and joins us here in a limbog eleven three studios.

Great to have you here. You're looking at Qualcom and Broadcom in particular. Let's start with just a basic question here Broadcom had had offered or said it intended to buy Qualcolm. What is Broadcom at this point what's it looking to do. It's looking to almost double inside, which is actually quite scary when you look at how big

this thing is to begin with. So the what we call the enterprise value obviously the sort of value of the company past, and that is a hundred thirty billion, I think, is what they would be paying for Qualcom. So you're putting together two of the biggest companies in the chip making space, and obviously semi conductor chips are in pretty much everything we use these days. Um, the interesting thing for Brogom is Brogram is a sort of

acquisition machine. It's the company that you know, Hocktown. The chief executives gone out. He's bought and bought and bought, always through friendly deals. And this time not only is this shaping up for a very big hostile they went in a hostile They didn't approach the company behind the

scenes and say, hey, guys, you want to dance. They just went straight over the top and said, you know what, we know you don't want to dance because maybe your sharehold is Qualcom rejecting this this over true, Let's talk about the what what Broadcom has been up to recently. Just a couple of weeks back, looking in the Oval Office, we saw time visiting with the President announcing it intends to move at Broadcams World head quarters to to the

U S to who knows where. What does this say about the regulatory landscape and its approach to to deal making. What an unbelievable coincidence right there in the White House one then, and they're announcing a big hod style the next. Um. Look, what it says is that I think the two things broke. Com obviously knew that this is this is going to be a hugely sensitive deal from not only a regulatory point of view, but also just from the point of view. You know, this is a big U S company being

put together with another big US company. If if they had been still an overseas company Singapore domicard, then that would have potentially been something that Quacolm could have could have used to get it blocked. That's right where we wanted to go. This is not to US companies, right technically, Since then, little yeah, since the tea party, it's not Michael, sure, come on, I mean Bill comes a sort of strange beast. You know, it's it's certainly Singapore control. But thank you,

But but build Calm. It's called build Calm because it bought Build Calm, so that was a U S company. G E plunging now nineteen point eight eight. That's a real drop down here, going comment by comment on Flarin again, nineteen dollars sixty. I believe five cents is where it was November two. I'm sorry to get this going on. I mean, I'm looking at g it's said, but it's not Broadcom. It's not right a U. S company. It's

not even Broadcam, it's not broad comments. Sort of it's a weird company, isn't it, Because it's like, you know, at what point does the company stopped becoming the company, because it's just gone out and bought other companies. It's a sort of, you know whatever, a patchwork of different businesses with a weird domicile structure and weird owned ship structure. But David, it's like Tapestry, Tapestries coach, you saved me, David,

heard about this? Where did things go from here? Let me just close that with yet on this that we have Qualcom rejecting this bid from Broadcast, which is the least surprising thing in today at the Yeah, of course, so what happened next, and what does this mean for broadcast as it continues to I don't know who we've I don't want to make it more complicated, but let's

just do it anyway. So, so Qualcomma in the process of buying a Dutch company called n XP, which is another huge company in the space, at paying around forty billion dollars, they could potentially throw another let's say ten billion dollars at that to try and effectively use it as a poison pill. So they would say, look, now, as a combined business with so ridiculously overvalued, the brock

On can't come in the bus. If they do that, I think their showholders rightly will go to Bananas and Hammond. Thank you so much for the update on broadcast qualcom Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene David Gura. Is that David Gura before the podcast? You can always catch us worldwide. I'm Bloomberg Radio.