 Good day fellow investors. Today we are going to discuss a stock that I have received a lot of questions about so it is appropriate to do a video about it. We are going to talk about General Electric. It is a company that hasn't had such good times in the last 12 to 16 months so it is appropriate to see what is the intrinsic value, what's left there, to see what's the risk and reward in investing. Whenever you approach a stock that has fallen, what was it, 60% in the last year there is always to watch the risk, the fundamentals, has it hit its own fundamentals where it would become undervalued if it goes below and what's the potential upside in the next two or three years because usually investors tend to really focus on the short term, replicate the short term into the long term and from there derive value, an intrinsic value of a stock. We'll try to look at a little bit longer perspective, look at the value in the balance sheet if there is any and see what would be a risk reward scenario when investing in General Electric and if it is a good investment now. First let's see what happened in the last five years. You can see the stock is down 33.20% as I'm filming this however the biggest decline has happened in the last year, year and a few months as the stock went from above 30 to the current 15. However General Electric is a blue cheap stock which means that it has history, it has the markets confidence, it pays a dividend so it's always attractive to a lot of investors and if you are a broker you can sell GE to clients that's relatively easy, it has a brand, it has everything. So let's see at the intrinsic value which will come out not in one number but in a range of numbers as Wood Buffett say I prefer to be vaguely right than precisely wrong. Intrinsic value of course present value of the future cash flows that will be distributed to investors. However perhaps even easier is to see what will be the average future cash flows, attach evaluation to that and then you get an approximate number of what Wood GE's intrinsic value be. Operating cash flows have been very high 13 billion almost in 2016 down to 11 billion 2017 however what you want to look at is free cash flows and those are expected to be in 2018 between 6 and 7 billion so free cash flows that will be available for dividends or who knows acquisitions depending on what's GE take there. If I attach cash flow valuation of 10 that gives me a return of 10% as an investor on what I invest I get an intrinsic value between 6.8 dollars and 7.9 dollars however if I attach let's say market valuation to those cash flows so a 20 let's say 20 price to cash flow, price to free cash flow I double that value so we get from 13 to somewhere 16 would be an intrinsic value from the current cash flows. If general electric manages to reverse its faith improve the margins improve the profitability and grow in the future then that intrinsic value might also increase and what's very important to note with intrinsic value it really depends on you it depends on the rate of return what you want to see from an investment the business return the earnings return if you expect 10% the price to free cash flow will be 10 for you if you expect 5% the price to free cash flow will be 20 if you compare your investments to the market that's something very tricky what if the market falls 50% then you are definitely wrong so I prefer to invest from an absolute perspective rather than from a relative market perspective because it doesn't matter if something is 20% undervalued from the market when it is still 50% over value from its intrinsic value that gives me my required return on investment. Now the main question for GE is how will those cash flows evolve in the future as you can see GE is in the right sectors that will probably do well in the future power renewables health care aviation all those sectors will see growth in the future will see also competition nevertheless GE market leader in many of those sectors there might be psychicality they might be up turns and downturns but we can estimate some growth there are also some that I think bad sectors like the Baker huge acquisition something like that but okay nevertheless we can expect some growth so if General Electric manages to bring the free cash flow available to shareholders to let's say an average of 10 perhaps even 15 in the long run however that would be 15% of revenues which is a little bit high so let's say 10 billion then the fair value for me would be 10 for the market would be still 20 as the markets are going as there will be probably a correction or bear market in the next year two years perhaps it's better to wait for GE to be closer to 10 or even in single digits before investing because looking at cash flows looking at other issues that could happen the stock could go even lower the lower the price the lower is the risk that's a simple investment truth one of the things that can happen is that GE is forced to do more impairments in 2015 it acquired Alstom however many think that that acquisition didn't lead to what GE expected as General Electric expected a 15% return on investment but the return is in the single digits so there could be more impairments to the goodwill if we look at General Electric's goodwill we can see that it has been piling up in the last years thanks to all of those acquisitions that it made and you can see how due to the Alstom acquisition in 2015 it went from 50 billion to 60 something billion so impairments of 10 20 billion Baker huge or Alstom or whatever there will be probably in the future impairments those are not a cash expense however might lead to trouble and really really put more negative pressure on General Electric stock so such kinds of impairments might present an opportunity because you as an investor you look at the future cash flows what happened in the past is unfortunately a sunk cost it isn't nice but what is on the balance sheet doesn't really matter to future cash flow so if they impair it okay it's a one-time hit hasta la vista and they can go on if that is a trend that they will impair everything and then there will be credit concerns because of the lower balance sheets that is the problem of credit rating at agencies and how they view a balance sheet because if they have to wait for an impairment to say that something is less valuable they are really incapable that's it nevertheless let's look at the book value unfortunately if we if we impair the goodwill and intangible assets that can be questioned there is no value in GE for the shareholder so if there is turmoil if creditors get scared and you can see that there is a lot of liabilities 81 billion in liabilities directly attributed to General Electric not GE capital so there could be really issues with General Electric which would create a better investing opportunity because in the long term perhaps the sectors the technology the growth the brand might prevail just a quick look at return on invested capital average return over the last years five years 3.77 percent when things go well it is around 4.5 percent so this is what you can expect for this company in relation to growth in the future so to conclude if GE would be valued as the market is valuing other companies now if there is an uptick in revenues in profits in improving margins if things go well and things stabilize then you can see it again at 30 like it was 15 months ago however from a value perspective from an investment perspective from a long term investment perspective where you look at the business the value of General Electric is between eight and in a good case 15 16 which is again the price now so I would really wait for eight there will be other investments opportunities and at eight we will look again at GE and say okay now it might be a good investment if there is a series of negative news if there is a market correction I think we could see it at eight and then buy it at a 50 percent discount from current prices just an example of what can happen the recent SEC investigation that could lead to more accounting questions and of course impairment because that's a big company accounting can be really questioned and if there is a short attack that attacks the accounting you can really see lower prices even if accounting and impairments don't change the actual business the actual business just continues as is so General Electric from my perspective is now speculative because it is close to its intrinsic value but the hope if you invest in it is that it gets fairly market value which a lot of good things have to happen but there could also be bad things that happen that lower the price so the risk reward is equal it's not asymmetric so wait for lower prices for the investment to be in a positive asymmetric risk reward with high rewards and low risk thank you for watching looking forward to your comments what do you think about GE let's create a discussion so that we all learn together and we add value to each other thank you I'll see you in the next video