This episode breaks down GE's fall from the world's most valuable company. Analyst Josh Aguilar blames a short-term culture and terrible capital allocation—GE Capital used cheap borrowed money to boost profits, nearly collapsed in 2008, and management bought high and sold low on deals like Alstom (bought for $10B, wrote down $22B). GE is now splitting into three: Aviation (jet engines, strong service revenue, bullish), Healthcare (MRI machines, good cash flow), and Vernova (wind/gas turbines, risky due to Chinese rivals). Key holdings: GE Aviation (demand recovering), GE Healthcare (likely to pay dividends after split), GE Vernova (losses, management targets doubted).
At a Glance Morningstar analyst Josh Aguilar delved into the rise and fall of General Electric (GE) on the Business Breakdowns program. The core argument is that GE’s decline from the world’s largest company to its current state is primarily due to excessive reliance on leverage and capital allocati
Morningstar analyst Josh Aguilar and host Matt Reustle delve into GE's journey from the world's largest company to its disintegration. The primary cause of GE's decline is not external shocks, but a combination of cultural flaws and capital allocation missteps—the former manifesting as short-termism and risk neglect, while the latter is reflected in GE Capital's leverage games and a series of high-buy, low-sell transactions. Aguilar argues that GE's success was largely propped up by leverage, rather than genuine management excellence.
Josh Aguilar notes that the GE of 2000 is a completely different company from today. In 2000, GE had a market capitalization of nearly $600 billion, CEO Jack Welch was named "Manager of the Century" by Fortune, and the company was recognized as the "Most Admired Company" by the Financial Times. From 1996 to 2000, shareholders enjoyed an annualized total return of 30%; over the prior 20 years, the annualized return was 23%. In 2000, revenue was nearly $130 billion, operating cash flow exceeded $15 billion (with free cash flow of nearly $13 billion after $2.5 billion in capital expenditures), and dividends totaled $5.4 billion.
In contrast, today: 2021 revenue was only $74 billion, free cash flow was less than $2 billion, and dividends were just $575 million. GE was once one of the most widely held stocks, but now struggles to convince investors to buy into its transformation story.
The remaining businesses consist of just three segments: Aviation, Healthcare (spun off in early 2023), and Energy (Vernova, spun off in early 2024), along with legacy GE Capital assets including equipment financing, insurance liabilities, and Swiss franc-denominated Polish mortgages. Divested assets include: NBC, investment bank Kidder Peabody, plastics, appliances, locomotives, lighting, most of GE Capital, the oil and gas business (Baker Hughes), and biopharma (sold to Danaher for over $20 billion), among others.
Aguilar argues that GE’s problems boil down to two points: culture and capital allocation, which reinforce each other. The core issues of the Welch era were twofold: first, short-termism sacrificed long-term rational decision-making; second, there was a failure to control downside risk. Both were realized through GE Capital—which, under Jeff Immelt, once contributed nearly 60% of GE’s profits.
Welch used GE Capital as an "earnings management tool," leveraging the financial business to mask weak quarters in the industrial segment. One book alleges that Welch instructed subordinates to "leave 5 cents in the EPS pocket," which was at best low-quality earnings and at worst financial engineering. Aguilar emphasizes that a company cannot consistently beat expectations without incurring long-term negative consequences.
GE Capital seemed plausible: Welch discovered that the financial services industry was easier to profit from than manufacturing. GE operated like a bank but without bank regulation, using its AAA credit rating to secure cheap wholesale funding (short-term market borrowing, rather than more expensive deposits). However, this "competitive advantage" was illusory—value investor Seth Klarman once warned: leverage can blow you up overnight. During the 2008 financial crisis, the short-term lending market froze, and GE, lacking a deposit base, faced a situation akin to a bank run, ultimately turning to the government and Berkshire Hathaway for help.
After the crisis, the Dodd-Frank Act designated GE Capital as a systemically important non-bank institution, requiring it to hold more capital. Through DuPont analysis, the ROE of financial services depends on asset returns and the asset-to-equity ratio—the latter deteriorated due to higher capital requirements, causing GE’s ROE to collapse.
Immelt’s capital allocation record was even worse. Aguilar lists a series of transactions:
| Transaction | Amount/Outcome |
|---|---|
| Sale of NBC (2011) | Enterprise value of less than $40 billion, far below AT&T’s $110 billion acquisition of Time Warner |
| Oil & gas investments (10 years) | Over $14 billion in acquisitions of drilling and transportation companies, most eventually sold |
| Share buybacks (last 3 years) | Tens of billions of dollars, followed by a halving of the stock price |
| Predix industrial IoT platform | Billions of dollars invested, partially sold to Silverlake, with most merged into a new energy company |
| Acquisition of WMC (subprime lender, 2004) | Closed after losses, plus $1.5 billion in civil penalties |
| Acquisition of Alstom (gas turbines) | $1 billion in cash, ultimately impaired by nearly $22 billion |
Aguilar comments: Immelt had an almost uncanny ability to "buy high and sell low." The worst was the Alstom deal—GE expanded aggressively while Siemens had already scaled back capacity, which Aguilar likens to "renovating a dilapidated house." Citing journalist Tom Gryta’s investigation, he notes that Immelt had a tendency to "avoid bearish views" on anything he wanted to do, leading to a disconnect from reality, particularly in overlooking aggressive revenue recognition practices in the power business.
Aguilar believes that the core advantage of GE’s remaining businesses lies in their presence in oligopolistic markets, all following a “sell hardware first, then high-margin spare parts and services” business model.
Aviation (Most Important Business): Under normal cycles, it achieves mid-single-digit organic growth with an operating margin of approximately 20%. Due to pent-up demand post-pandemic, Aguilar expects commercial aviation revenue to grow at a double-digit rate over the next few years. The LEAP engine, a joint venture between GE and Safran, is the market leader in narrowbody aircraft: it is the exclusive supplier for the Boeing 737 Max and competes with Pratt & Whitney’s GTF on the Airbus A320neo. The importance of narrowbody aircraft is rising—the Airbus A321XLR can fly 4,300 nautical miles (London to Miami). In the widebody segment, the GE9X competes with Rolls-Royce.
A True “Razor and Blade” Model: The LEAP engine has a list price of approximately $14 million, but customers actually pay less than 70% of the list price (discounts gradually narrow as the engine is validated, but still exceed 50%). Service revenue is split roughly evenly between time-and-materials billing and flight-hour agreements (CSA)—the latter shifts maintenance responsibility to the OEM but provides more stable cash flows. Key driver: global revenue passenger kilometers (RPK), which are tied to the income growth of the middle class in emerging markets.
Healthcare (Second Most Important Business, Spun Off in Early 2023): Sells heavy equipment such as MRI, X-ray, and ultrasound machines, and is increasingly adding AI/ML digital capabilities. Customers are hospitals and outpatient centers. Aguilar expects steady low-to-mid-single-digit growth, with operating margins in the high teens and free cash flow conversion of approximately 100%. Key drivers: aging population, improved healthcare accessibility, rising chronic diseases, and physician shortages. It operates in an oligopoly alongside Siemens Healthineers and Philips.
Energy/Vernova (Spun Off in Early 2024): Includes power, renewable energy, and digital grid. Renewable energy competes with Vestas and Siemens Energy, while power competes with Siemens Energy and Mitsubishi Heavy Industries. Aguilar is “very skeptical” of management’s long-term targets, believing they underestimate competitive risks. Renewable energy may achieve high-single-digit growth but will not break even until mid-decade. Power, as a “transition technology,” benefits from the energy transition (addressing the intermittency of renewable energy).
Spin-Off Rationale: Aguilar bluntly states, “GE lost its right to exist as a conglomerate long ago.” As Buffett discussed in Berkshire Hathaway’s annual reports, the value of a conglomerate lies in tax-free capital flows, but this holds only when capital allocation outperforms the market—GE’s stock price history has proven its failure. After the spin-offs, each business can focus more, make independent decisions based on different investment cycles and capital needs, and is expected to achieve valuation re-ratings consistent with peers.
Aguilar believes that the new management (Larry Culp) has fundamentally shifted capital allocation toward organic investment. In aviation, the focus is on developing a sustainable engine (RISE project) in partnership with Safran, targeting a mid-2030s launch of an unducted fan design. In healthcare, investments are directed toward AI/ML and digital products. In renewable energy, offshore wind is a major investment direction (currently unprofitable but with strong growth).
Regarding share buybacks, there is approximately $3 billion in existing authorization—Aguilar argues that the current share price is undervalued relative to intrinsic value and should be utilized. Post-spin-off, each company will independently set its dividend policy: the healthcare company, given strong free cash flow (100% conversion rate), may pay 35-60% of profits as dividends; the industrial company may pay 15-50%.
Key risks: The renewable energy business has seen its recent operating margin deteriorate from negative mid-single digits to negative mid-teens, driven by PTC cycles and price competition. Aguilar specifically notes that Chinese competitors (Goldwind, Ming Yang) are entering the North American market, an "underappreciated risk" that will exert sustained pressure on GE. Unlike aviation, renewable energy lacks long-term service revenue—the LED lighting lesson shows that not all hardware businesses can replicate the "razor and blade" model.
Aguilar's core judgment: The commercial aviation recovery will exceed expectations—the correlation between RPK and GDP per capita has been disrupted by pandemic lockdowns, pent-up demand is being released, and the business has high operating leverage (high fixed costs, with incremental profits flowing significantly to the bottom line). However, the market is currently dominated by fear, focusing on the spin-off timeline, renewable energy losses, and whether these businesses can return to normal profitability levels.
| Position | Analyst View | Key Data |
|---|---|---|
| GE Aerospace | Bullish (core value driver) | Normal cycle 20% operating margin; LEAP engine list price ~$14 million, actual payment over 70% below list price |
| GE HealthCare | Bullish (spin-off catalyst) | High-teens operating margin, 100% free cash flow conversion; expected to pay 35-60% of profit as dividends |
| GE Vernova (Energy) | Risk warning (skeptical of management targets) | Renewable energy recent operating margin in negative mid-teens; breakeven not expected until mid-decade |
| Siemens Energy | Neutral (competitor) | Direct competition in power and renewable energy |
| Vestas | Neutral (competitor) | Direct competition in renewable energy |
| Pratt & Whitney | Neutral (competitor) | Narrow-body engine GTF competes with LEAP |
| Rolls-Royce | Neutral (competitor) | Competition in wide-body segment |
| Danaher | Neutral (buyer) | Acquired GE Biopharma for over $20 billion |
1. Aguilar believes that GE's success was "primarily driven by GE Capital, with little to do with management excellence" — Without the scale of GE Capital, GE could not have achieved the returns it once did, and investors have long overlooked this fact.
2. "GE lost its right to exist as a conglomerate long ago" — Aguilar cites Buffett's view: the value of a conglomerate lies in superior capital allocation compared to the market, and GE's stock price history has proven its failure.
3. Immelt's capital allocation is summarized by Aguilar as "buying high and selling low" — The Alstom deal ($1 billion in cash spent, $22 billion in impairments) is likened to "renovating a condemned building"; the NBC sale (under $40 billion) was far below comparable transactions (AT&T/Time Warner at $110 billion).
4. Aguilar points out that renewable energy cannot replicate aviation's "razor and blade" model — The LED lighting lesson shows that not all hardware businesses generate long-term service revenue; aviation's complexity, FAA regulation, and safety requirements create unique service barriers.
5. Chinese competitors are an "underestimated risk" for GE's renewable energy business — Aguilar argues that as Chinese manufacturers enter the North American market, GE's "regional segmentation" competitive advantage is eroding, and pricing pressure will persist.
6. Aguilar believes the commercial aviation recovery will exceed expectations — The correlation between RPK and GDP per capita has been broken by the pandemic, pent-up demand is being released, and the business's high operating leverage will drive significant incremental profit inflows.
7. "Leverage can blow you up overnight" — Aguilar cites Seth Klarman's warning, noting that GE Capital's wholesale funding model led to a bank-run-like situation in 2008, marking the turning point of GE's decline.
8. Aguilar argues that GE's centralized management model is "a textbook example of why it doesn't work" — Contrasting with Berkshire's decentralization ("trust to the point of abdicating responsibility"); Larry Culp is pushing each business to be self-sustaining and implementing lean management (safety, quality, delivery, cost).