Earlier this month, long-time General Electric Company (NYSE:GE) CEO Jeff Immelt announced he was stepping down, to be replaced by John Flannery, current president and CEO of GE Healthcare.
The news was neither surprising nor unwanted by GE stock owners. While Immelt was an honorable leader, even after 16 years of his tutelage the chemistry was just never there. Revenue has been dwindling for a decade (albeit partially because General Electric has been spinning off divisions), and GE stock is presently trading right where it was in late-1998. Even the beloved GE dividend has been mostly stagnant since 2014.
Flannery has his work cut out for him if he wants to rekindle the glory days Jack Welch fostered for the organization.
Where does he start? For that matter, how should current and would-be GE stock holders see the company as it transitions from one CEO to the next? The first thing investors will want to do is the first thing Flannery has already done: pinpointing where GE does and doesn’t make its money, and taking note of any clear trajectories there.
Fortunately, there are a couple of simple graphics below that will make it easy to figure out where General Electric has been and where it’s going.
General Electric, in Pictures
First things first — a look at the company’s past and projected revenue and earnings will illustrate why some sort of change had to be made.
Sure, the expected future looks better than the recent past. The company’s done anything but convince owners of GE stock that the company can actually do anything to change its current revenue/earning trajectory.
Perhaps the more relevant question is, how and where is General Electric making its money? A close second: How protected is the GE dividend? The pros have already factored in a noteworthy cut in the company’s payout, but unless the earnings trajectory actually changes, they may not have curbed it enough.
The more important visualization, though, is a look at each of the company’s divisions. From this detailed view, one can pinpoint exactly where General Electric is, and isn’t, thriving. (And, apologies upfront about the crowded chart; GE’s got a lot of divisions. Revenue and earnings are color-coordinated, though.)
A couple of things are clearly working well for GE. One of them is aviation, which is the company’s biggest source of income, and second-biggest source of revenue. General Electric came out of this year’s Paris Air Show with a lot to be excited about, and Credit Suisse analyst Julian Mitchell expects more of the same success going forward. He recently noted:
“Aviation profit growth is likely to slow to a mid-single-digit CAGR in the next few years, in our view, owing to Mix headwinds. Although in common with Honeywell International (HON) and United Technologies (UTX), GE is turning up the heat on its suppliers (Additive Manufacturing will help it – $3.9bn of productivity savings from 3D printing have already been identified, against an initial target last year of $3-5bn eventually). We believe Aviation’s share of company profits will likely expand, as we see the exit of certain other assets as Mr. Flannery starts to re-shape GE’s portfolio. This should be helpful for the valuation of the overall company, given Aviation’s high profitability and cash margin levels.”
The company’s power division is also ramping up revenue and profit.
On the flip side, a few things either need to be turned around or booted.
One of the bigger disappointments is the company’s deteriorating energy connections and lighting business, made up by product lines like power-grid equipment. Though it grew through 2015, it hit a revenue and earnings headwind. That’s partly due to last year’s sale of its appliance business, though some of the weakness there is due to weakened demand for grid-control products.
Another sore spot is the company’s oil and gas business. While demand on that front is largely a function of crude oil prices, GE hasn’t managed that lull particularly well, and that’s starting to take a serious toll on the bottom line.
One area that’s not presently a big piece of the pie but could grow into one is renewable energy. That arm’s top line was up 44% last quarter. Though it still only counts for about 7% of GE’s total business and roughly the same degree of General Electric’s earnings, it’s got potential. It’s the only area where GE has a presence in a market that’s not yet fully matured.
Looking Ahead for GE Stock
These are the pieces of the puzzle John Flannery will soon be handed. Some are solid, and some aren’t. Some can be revived, and some can’t. At the very least though, current and would-be owners know what’s doing well and what isn’t, and what’s likely to change. Note that under Flannery, odds are good that more divisions could be shed, allowing the company to focus on executing on its core strengths.
One thing is for sure though…. for better or worse, some kind of change is coming. Flannery is largely viewed as a step forward, though few investors have voiced a high degree of confidence he’ll be able to make a sweeping change for the still-complicated, unfocused conglomerate.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.