Whether you liked his management style or not, Jack Welch directed General Electric Company (NYSE:GE) well and delivered fantastic returns to GE stock holders. And when the torch was passed to his successor, Jeffery Immelt, he set a very high bar. Still, by all accounts, Immelt has done an excellent job of re-imagining the company and guiding it through some of its darkest days.
The problem is, Immelt hasn’t exactly done a great job at turning his vision for today’s General Electric into share price gains. GE stock has floundered since the recession and the start of his tenure.
This significant underperformance is finally starting to grate at several of GE’s largest shareholders, including Trian Partners’ Nelson Peltz. The drumbeat calling for Immelt’s departure is growing louder.
They might have a point. Removing Immelt from his seat could be the ultimate key to unlocking the potential in GE stock.
General Electric’s Chief Problem
On the surface, GE has a lot going for it. Its forays into the industrial internet of things (IoT) and automation software have the potential to change the game for manufacturers over the long haul. Meanwhile, its mega-buyout of oil & gas services giant Baker Hughes Incorporated (NYSE:BHI) and Alstom’s power generation and electricity transmission businesses have made General Electric an energy sector leader.
Throw in GE Aviation and Healthcare, and the story sounds promising. But it hasn’t translated into significant gains.
Over the past 10 years, GE stock has been the worst-performing stock in the Dow Jones Industrial Average and has underperformed the S&P 500 by a mile. Shares are actually in the red, and it’s only thanks to the dividend that shares have pushed out a 26% total return. The S&P 500 has more than doubled once you include dividends.
The only common thread over the past decade has been Immelt.
You can make the argument that Welch possibly set up Immelt for failure in some regards. After all, GE Capital and its leveraged state and growing reliance on risky assets put the company in risk of failure during the crisis. Businesses like cable and network television didn’t really fit the industrial mold of General Electric.
However, Immelt took over long before the recession and has had a history of making big decisions at just the wrong time. GE went hard into oil and gas roughly near the top, then sold its appliance division at the bottom just as demand for washing machines/fridges was rising.
These sorts of missteps have plagued GE stock. General Electric has managed to miss analysts’ revenue estimates in 10 out of the past 13 quarters because of various “one-off issues.”
In the end, Immelt hasn’t been able to turn the massive GE ship on a right course fast enough. The proof is in the pudding.
Activists Are Circling GE Stock
Immelt’s lackluster performance is finally starting to get noticed. GE’s board gave Immelt a $21.3 million compensation package last year — sounds big, but it was down 35% from last year’s pay.
The board isn’t alone in its dissatisfaction.
Rumors are beginning to circulate that Nelson Peltz — head of activist hedge fund Trian Partners — is upset with Immelt over the underperformance of General Electric stock. Trian started a $2.5 billion stake in GE back in 2015 as the company was transforming itself back into a pure industrial giant. Some believe Peltz will start to push the activist button to get Immelt to retire early.
That could be a real win for long-suffering GE shareholders.
The news alone could be worth up to 5%, according to analysts, but the longer-term victory would be a continued slimming down of General Electric under new management. The problem with conglomerates is once they hit a certain size, they become unwieldy. That could be the case at GE, where power generation and healthcare don’t quite mix.
The best course of action could be to split GE. Immelt had hinted at that when he announced the BHI acquisition. But he’s been reluctant to do so more broadly overall. Fresh blood and a push from Peltz could be the catalysts that would make it happen.
If history is any guide, the value is there. After Tyco’s break-up, each of its parts went on to outperform its former parent and GE. Another great example is ITT Corporation (NYSE:ITT) and its split into three parts.
Immelt Has to Leave General Electric
GE is a wonderful collection of businesses. The problem is that Immelt hasn’t done a good enough job of making all the parts run together smoothly. Perhaps, by ousting the CEO, GE could finally shine as a much smaller and separated company.
As they say, where there is smoke, there’s fire, and Immelt’s ouster could be coming sooner than later. That departure could make GE stock a great buy as it really sets itself up for the future.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.