Thursday, November 1, 2018

Big-Company Woes: Sears, GE and Tesla

Some well-known companies have had significant operating challenges the past year or two
Stock markets are in an unsatisfactory swirl in the middle of fall, 2018. Markets flirt at being at a turning point or precipice, not sure whether to go up or prepare investors for correction or prolonged downturn.

Some familiar corporate names themselves, one by one, have dominated recent news. They blast onto the top of financial-media headlines and then go away and then return, when the issues that plague them don't disappear or don't get resolved with finality.


Sears announced a bankruptcy, and that's a surprise to few people. For some, it's a wonder it stayed away from courts until now.  The company has not made money in years and has had huge cash-flow deficits from old, fading business models and unappealing and unspectacular physical storefronts.

The company generated nearly $40 billion in sales in 2012, but could barely reach $16 billion last year. Sears didn't survive the onslaught of the Amazon generation and was ill-prepared to transition to online retail commerce.  Or it did so and stumbled out of the box.

It restructured, reorganized, tweaked the brand, bought other brands, sold other brands, sold real estate and store properties, restructured some more, and scrambled to find new ideas.  Not much worked, beyond its ability to sell off properties, fixed assets and brands to manage what under ordinary circumstances is a reasonable amount of debt on the balance sheet ($2-3 billion for much of the past five years).  

When you are suffering from billion-dollar cash-flow deficits year after year from operations, any amount of debt can become a threat to your existence.  (The company lost between $380 million-$2.2 billion in each of the past six years.) Sears continued to bleed cash until not much remained on the balance sheet to get it through this winter and onward into spring. With about $250 million in cash reserves, the inevitable (or what could have happened years ago) occurred: A bankruptcy filing.

Sears now becomes relegated to business-school history books. Some MBA schools might decide to write a teaching case about how an illustrious retail brand plunges toward insolvency after it is purchased by a hedge-fund investor not as astute and effective in running a storied retail organization as he thought.  ESL, the hedge fund, had ideas, took risks, hired outsiders, and tampered and tweak the business model in ways that didn't work.  Company management was guilty, nonetheless, in not being able upgrade stores and make them (including those at  subsidiary Kmart).  They aimed to bring excitement and energy to the Sears shopping experience, but didn't succeed.

He (Eddie Lampert) tried and devoted much time and attention to reviving the company and making it profitable, although his detractors disliked his running the company as an absent CEO. His experiments didn't work. The marketplace continues to watch, however, because he shrewdly restructured the funding side of the balance sheet such that if there are crumbs to be paid out from liquidating more Sears assets, they will accrue to him. (The hedge fund is an investor and is also a big debt lender.)

General Electric

For decades, General Electric had long been considered one of the world's best managed global companies. It groomed some of the best general managers of industrial operations. Those who didn't reach the top were tapped to run businesses and companies elsewhere.

Not it has reached a fork in the road.   In the post-Jack Welch (former CEO) GE, the company has tripped as a conglomerate and contemplates what to do with its bundles of unrelated businesses.

A company that easily glided and remained near the top quartiles of Fortune 500 lists and was firmly settled into Dow Jones trading indices now has market value ($88 billion) that is about half that of a company like Uber, which is still in the late years of being a start-up and plans its own public offering of equity with almost joyous fanfare.

GE has been a mixture of many businesses, some of which are unrelated and some of which have questionably rationalized.  There have been jet turbines, appliances, and financial services.  It once included a securities broker/dealer and a television network.  And the company has parked its business plans around the world.

Revenues still top $120 billion a year, but profits are still hard to come by.  Some of the earnings sluggishness is its steady restructuring and selling bits and pieces of businesses.  The financial crisis hurt its previous commitment to financial service and dreams of becoming a financial powerhouse, but many of the old GE Capital assets remain.

The fluctuating and unpredictable performance from quarter to quarter for a company where operating flows used to be clockwork predictable has led to the departure of two CEOs (Jeffrey Immelt and John Flannery) in less than two years.  In the annals of U.S. corporate history, GE leaders were supposed to stick around and produce stable, growing bottom lines for at least a decade.  In an un-GE-like fashion, it went outside to find a new CEO (Larry Culp) in September.

GE has enormous debt loads (over $130 billion), but it can manage that and that's not its most plaguing issue.  There is still sufficient operating cash flow (although more erratic than before) to keep debt investors calm.  Stock investors aren't happy. Shares valued over $18 in January are now headed toward $10, and the year is not over.

Operating cash flows have been choppy the past few years and must be high enough to accommodate about $7 billion in annual capital expenditures and $8 billion in annual dividends.  To keep that going (in the way shareholders hope), it must continue to sell off assets and consider more debt. In late October, it took an alarming, but necessary step by announcing it would slice much of the dividend payouts.

Like Sears, GE has adopted strategy, reviewed strategy, abandoned some of it, and continues to search for ways to determine what GE is supposed to be and do.  In September, it decided to continue a campaign to clean up the balance sheet by charging off huge amounts of "goodwill" that arose from purchasing some industrial businesses for amounts far more than what they were worth. It continues a long-term exercise of filtering and reviewing business lines to decide what should stay and what should go.  On the table this month:  Should it sell its healthcare-related businesses?

Unlike Sears, GE will likely stick around for a long time; it may just resolve to become a shell of itself.


Tesla's Elon Musk always finds ways to remain in the news.  His headline splashes across financial pages often describing new projects, new risks, new challenges, and new emotions.

There is his company, Tesla, where not surprisingly revenues have soared in recent years.  There has been and will be demand for his product--slick, electric cars bought by consumers generally happy with their purchasing decision.  Tesla's story nowadays is more an operational tale of woe.

Revenues have grown in Amazon-like fashion (from $4-11 billion between 2015-217). But costs have surged even more.  Tesla and Musk don't hide behind the cost numbers.  Costs for growing in an specialized segment of the auto industry are inevitable and necessary. Costs, they argue, will eventually be managed and pushed to reasonable levels.  But not now. The combination of operating costs and required capital expenditures topped $16 billion last year. Real cash outflow.

So Tesla and Musk beg for patience.  In the meantime, surging operating costs are accompanied by surging amounts of debt (now over $9 billion at Tesla), as the company had to construct infrastructure to support the product.  Because of costs, earnings and operating cash flows are non-existent.

Hence, we have a rapidly growing company--led by a sometimes distracted CEO--that has explainable, but uncontrollable costs and mounting amounts of debt. Tesla must convince its stakeholders (debt holders and shareholders) that that costs will eventually be contained and the red line of losses will turn into bulging positive cash flow.

Debt investors might be comfortable company meets regular interest payments.  (It has, believe it or not, about $3 billion cash reserves to get it through any short-term emergency or hurdle.) But can it pay down some of the debt when necessary and can it, if it needs to, refinance some of that debt?

If debt investors and lenders are uncomfortable and impatient, the company will have life-threatening problems.

For all three, stay tuned.  The stories are far from over.

No comments:

Post a Comment