90
22 December 2017 / Outlook BUSINESSPerspective
technologies, such as additives, across its business
units, giving them a signifi cant competitive edge.
These moats are being tested in GE’s power busi-
ness, which accounts for a third of its industrial rev-
enue. Blame the renewable energy revolution for that,
because sales of large gas turbines have plummeted
globally. A shrunken pie has led to intense competi-
tion for new orders and also for the more-profi table
service business. The fall in sales may not be cycli-
cal but structural, owing to falling costs of solar and
wind power. While GE is a major player in the highly-
competitive wind turbine business, the lead in solar
is mainly with Chinese companies.
Capital was misallocated as GE increasingly bet on
fossil fuels with the acquisition of the power busi-
ness of Alstom in 2015. There were other capital al-
location decisions such as the acquisition of oil and
gas assets which were probably not wise, as was the
underfunding of pension.
Will capital be more prudently managed in the fu-
ture? There seem to be some reasons to believe so, a)
The recent dividend cut of 50 % to align payouts to
cash fl ow generation b) Simplifi cation of businesses
retained c) Managerial incentives to focus more onreturn at all levels of capital allocation and d) The
presence of an activist investor (Trian Partners) on a
shrunken board of directors.
An asset-value approach for a conglomerate as com-
plex as GE indicates a range which varies from num-
bers slightly higher than the current enterprise value
to more optimistic numbers. A complete break-up of
GE is unlikely. Based on historical valuation metrics
such as median dividend yield and price earnings ra-
tios, there could be some more downside to GE from
the current level of $ 18.
Except with the benefi t of hindsight, it would be
hard to call the point of maximum pessimism or to-
tal capitulation, with 40 % of GE’s market capitalisa-
tion having already eroded year to date. But insider
buying has started at current levels.
Aft er a small initial commitment to GE shares, I am
currently undergoing the agony of hesitation.
Another iconic company, Walt Disney, has had to
pull up the drawbridge as its media magical kingdom
has come under attack. It is Disney’s media division,
which owns cable networks such as ESPN and Disney
Channel and broadcasting network ABC, which is
fi ghting its own version of Star Wars with streaming
OTT platforms such as Netfl ix.Disney has an enviable brand. It has created and
owns legendary characters and franchises and has
been able to seamlessly monetise them across mul-
tiple platforms — movies, merchandising and theme
parks, among others. The intellectual property that
Disney owns and its demonstrated ability to create
new franchises and monetise them in myriad ways is
its strongest moat.
However, selling subscription-based digital servic-
es (such as the to-be-introduced sports-themed ESPN
streaming service) directly to customers in a market-
place in which it does not have the fi rst-mover ad-
vantage will need new capabilities, even for a media
monarch such as Disney. Disney’s acquisition of a
controlling stake in BAMTech will bring in technolog-
ical capabilities for providing new streaming services
and enable it to learn more about the behaviour of
its viewers to customise off erings. Any acquisition of
some of 21 st Century Fox’s assets, such as Hulu, would
accelerate Disney’s ability to gain scale in streaming
services.
Disney’s competitive edge for new services would be
the exclusive content based on the intellectual prop-
erty it already owns and its creative teams. It wouldspend substantially less than Netfl ix on content cre-
ation and be focused on profi tability rather than mar-
ket share in the direct-to-consumer space. Following
a niche strategy makes sense when the trend towards
multiple streaming services by households is grow-
ing. A value proposition by Disney could coexist with
Netfl ix. It could possibly replace lost cable network
revenues with higher-margin streaming services rev-
enues and change the declining profi tability trend in
the media networks business.
Any DCF-based valuation approach based on some
degree of uncertainty on growth could throw up a
wide range of values. The current price of Disney
(around $ 103 ) is at a 25 % premium to many bear case
estimates. A sum-of-the-part valuation indicates ma-
terially higher asset values although there is little
chance of any of these assets being spun off. I am still
waiting to increase the small initial commitment to
Disney shares I made recently at lower levels.
Returning to St. Augustine, in Confessions, he stated
that he was infl uenced by the writings of Cicero. He
quoted: ‘It is not the discovery but the mere search
for wisdom which should be preferred even to the
discovery of treasures.’ This search for wisdom goes
some way in lessening the ‘agony of hesitation’. bCapital was misallocated as GE increasingly bet on fossil fuels
with the acquisition of the power business of Alstom in 2015