Wall Street’s judgments can be brutal for chief executives. Just look at the case of Jeff Immelt, now ex-CEO of General Electric Company (NYSE:GE). On the news of his departure, GE stock popped 3.6% to $28.94.
Immelt took the helm in 2001, just a few days before the terrorist attack that changed America. He certainly had big shoes to fill — that is, replacing the legendary Jack Welch. During his tenure, GE stock was a reliable money maker.
It certainly helped that the U.S. markets were mostly in the bull phase. But Welch had a clear-cut strategy, which involved Six Sigma management approaches and a focus on being one of the top players of each market the company pursued.
But as for Immelt, he really did not have a core philosophy. It seemed to change according to the latest corporate and technology fads. So yes, GE stock was the worst performer of the Dow Jones Industrial Average during his turbulent tenure, down nearly 30%. There was only one other stock that had negative returns during this period. It was Pfizer Inc. (NYSE:PFE) and its shares sustained an 11% loss.
Yet what about the future? Might GE stock be ready for a rebound — since the company will have new leadership? Perhaps. But I think it will take time. The problem is that GE remains a hodgepodge of businesses, many of which are subpar performers.
Interestingly enough, GE has tried to mask this with its marketing, which really does not reflect reality. The commercials are generally about innovation, creativity and imagination. It’s as if management really thinks it is like Apple Inc. (NASDAQ:AAPL), Snap Inc (NYSE:SNAP) or Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG)! But instead, the marketing seems to be more of a sign of a company that is out of touch.
Besides, if a company is truly innovative, does it have to keep advertising about it? Shouldn’t the products speak for themselves?
GE Stock Innovation
For the most part, much of the innovation has been about financial engineering, so as to try to keep up the earnings per share numbers. Part of this has been with buybacks.
But there have also been unloading of assets, such as GE Capital, the plastics business and the entertainment division. During the past 16 years, they have come to nearly $200 billion. Keep in mind that the current value of GE stock is $251 billion.
The other irony is that GE has not been particularly adept at targeting growth categories. A prime example of this is the aggressive push into the energy industry, which came at the peak of the market. Now it looks as if GE wants to spin off this business. A key part of this involves the merger of Baker Hughes Incorporated (NYSE:BHI).
Despite all this, the replacement for Immelt — John Flannery — is intriguing. He is a 30-year veteran of GE and has operational experience with the financial services and healthcare businesses. But his M&A chops may be the most important thing to consider. To this end, he led the deals for the spinoffs of Synchrony Financial (NYSE:SYF) and the appliances business.
In other words, to get GE stock back into gear, there needs to be a continued simplification of the business — which means more divestitures. As InvestorPlace’s Dana Blankenhorn has noted:
“[GE is] a collection of power generation, aviation, additive manufacturing and healthcare businesses that appear to be performing well, but which are unrelated to one another, and no longer have the tie of finance to bind them.”
But again, the restructuring of all this will not be quick — or without its risks. It is also important to keep in mind that the company has been erratic with its financial performance, having missed the Street expectations on sales for 10 of the past 13 quarters.
There has also been continued discrepancies between profits and cash flows — which can be a sign that management is engaging in aggressive accounting. During the latest quarter, the company reported net income of $653 million but cash flows were a negative $1.6 billion.
In other words, there is really no rush to get into GE stock right now. Flannery has quite a lot of work ahead of him.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
