For General Electric (NYSE:GE), 2019 was what CEO Larry Culp dubbed a “reset” year. After the stock surged 50% last year, it’s not a stretch to say the once downtrodden industrial conglomerate didn’t just write a reset chapter. It penned a redemption story.
It’s also safe to say Culp has set some high hurdles, particularly when it comes to streamlining the company’s business model. Each shareholder has a vision of “acceptable” returns, and while GE stock probably won’t jump another 50% in 2020, it’s certainly off to a good start. Shares are up almost 5% just this month.
Even after last year’s rally, Wall Street remains divided on the stock. On Jan. 23, Morgan Stanley upgraded it to “overweight” from “equal weight” with a price target of $14. That implies decent upside from the Jan. 24 close of $11.71.
However, noted GE bear Stephen Tusa doesn’t appear to be ditching his less-than-enthusiastic view anytime soon. For Tusa, who has a $5 price forecast on the stock, some of his concerns about GE come from the aviation business, often seen as one of the company’s most appealing units.
“Feedback from our recent trip to an airline leasing conference in Dublin suggests the engine leasing market is at an imbalance, with spare engine prices that are 10% to 12% higher than normal,” said the analyst in a recent note to clients. “Behavior from airlines is changing to more engine exchanges versus shop visits, leaning on lessors more for flexibility.”
The analyst estimates that spare engines account for 15% of GE Aviation’s revenue, a percentage that’s too high in his view.
Another Aviation Issue
Chances are that even casual investors have had their fill of Boeing (NYSE:BA)-related headlines. The abridged version is that the company isn’t entirely clear on when it can get the controversial 737 Max passenger jet back in the skies. Even if Boeing gives a hard-and-fast date, it’s not the company’s decision to make. Rather, the fate of the 737 Max rests with the Federal Aviation Administration.
This is relevant to GE because the company is a major Boeing supplier. And some suppliers are already feeling a pinch from the lack of clarity on the 737 Max. Put simply, GE’s ability to deliver on its numbers this year will be in peril unless the 737 Max goes back into service and Boeing resumes production.
Investors would likely punish weakness in either of GE’s key businesses — aviation and medical devices. It’s clear the honeymoon phase is over for Culp. Investors extended him some latitude during the reset, but now have no tolerance for the company’s missteps. GE isn’t a redemption story anymore. It’s an execution story. As in the execution better be good if not great.
Bottom Line: GE Has a Long To-Do List
Another issue that GE faces is that Culp (and investors) are paying for the mistakes of bygone eras. The company previously used acquisitions — some ill-fated — to make up for sluggish growth.
According to Roger Martin, a professor at the University of Toronto’s Rotman School of Management, that’s not necessarily a terrible strategy. However, “you’ve got to understand what the competitive dynamics are that justifies M&A to bulk you up.” Because Culp’s predecessors didn’t necessarily understand these dynamics, the new CEO is left cleaning up a mess.
That’s one of way of saying if Culp isn’t successful, Wall Street won’t care who caused the problems.
It’s a challenging backdrop and one that gives GE stock a “hold” kind of feel until Culp’s execution capabilities become clearer.
As of this writing, Todd Shriber did not own any of the aforementioned securities.
