For John Flannery, who is the incoming CEO of General Electric Company (NYSE:GE), it looks like his honeymoon will be quite short. Since the announcement of his post, the shares of the company have taken a hit. Consider that GE stock is off over 5%.
But then again, the poor performance of the stock price is nothing new. For the past five years, GE stock has only been able to log a return of 32%. By comparison, rival Honeywell International Inc. (NYSE:HON) has posted a sizzling 145% return during this span while United Technologies Corporation (NYSE:UTX) has posted a 68% gain.
Yet might CEO Flannery be the right person to get GE stock back into gear? Well, I think his skillsets are strong. In fact, he has both an operational background – such as with the turnaround of the healthcare division — as well as expertise with dealmaking. During his tenure, he has actually spent about half his time outside the U.S. It’s also important to keep in mind that Flannery does not have to get up-to-speed on General Electric since he has been with the company since 1987.
But even if he is successful, the process is likely to take quite a while. The fact is that General Electric is facing some major challenges.
Perhaps the most critical is the complexity of the organization. Even though there has been extensive restructuring over the years, GE remains a hodgepodge of businesses — many of which have few synergies.
What’s even worse is that the company has made ill-time moves into new industries! The most notable example is the major push into the energy business.
Actually, despite the problems, GE has continued to double down on the investments. Of course, this came with the acquisition of Baker Hughes, which is now part of public entity called Baker Hughes, a GE company Class A (NYSE:BHGE). This includes the multitude of oil and gas assets.
GE Stock Problems
So what’s the issue for GE stock? Well, the company still has material exposure to the oil industry, which continues to languish. According to a report from Moody’s Investors Service:
“Pro forma for the transaction, debt/EBITDA exceeds 3 times, while retained cash flow/net debt declines to less than 20%. Such levels underline the need for meaningful enhancements in earnings and cash flows through acquisition-related synergies, restructuring and cost saving initiatives.”
But there will definitely be many other thorny problems to tackle. Flannery will need to make tough decisions on the overall portfolio, such as to spin off certain assets. In the meantime, the company’s financials are far from encouraging. During the latest quarter, it reported net income of $653 million, yet the cash flows were negative $1.6 billion.
Note that such a wide discrepancy has been common with the results for General Electric stock. This is definitely an ominous sign of a lack of earnings quality. It could also be a potential sign that the 3.6% dividend on GE stock could be jeopardy … or, at a minimum, may not grow.
So all in all, there is quite a bit of uncertainty regarding GE stock. JPMorgan Chase & Co. (NYSE:JPM) analyst Analyst C. Stephen Tusa recently pointed this out, saying that the story on the company “is as open and undefined as it’s been in decades” and that there is no “quick fix.” Oh, and he slapped an awful $22 price target on GE stock, which is at a 15% discount to the current valuation.
Granted, this may be an overreaction. But given that Flannery will likely be focused on major restructuring for some time, it does not seem likely there will be any meaningful catalysts in the near-term to juice up the shares.
Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
