John Flannery, the new CEO of General Electric Company (NYSE:GE), has the hardest job in Boston. Predecessor Jeff Immelt left him with a mess. The company’s biggest asset, its oil and gas division, is under the hand of Lorenzo Simonelli at Baker Hughes A GE Co (NYSE:BHI). What’s left of GE stock looks like an incoherent collection of pieces, a conglomerate ripe for breakup.
Before leaving, Immelt was pressured by Nelson Peltz’ Trian Fund Management to bring earnings to $2 per share by next year. As of the first two quarters of 2017, GE hasn’t even managed to earn the 24 cent per share dividend.
Immelt had a high profile, vision and great self-regard. He also had a habit of buying high and selling low. Before he left, Wall Street had finally stopped buying his act. GE stock rolled over in 2017, giving back 20% while the Dow Jones Industrial Average is up 11%.
What Can John Do?
Flannery is starting his time at the helm with flinty optimism and an eye on operating costs.
His first two moves were to invest $2.7 million of his own retirement money in GE stock and push back completion of the new Boston headquarters complex to 2021.
Both moves are symbolic. The company will now move into some renovated warehouses in 2019, putting off construction of the 12-story showpiece building until a “phase two” of the project. Flannery, meanwhile, is putting an unsentimental red pen down on costs, closing a manufacturing plant in Rochester and moving that work to China.
Flannery also made with the rah-rah, giving employees three tenets that could have been written a century ago: “Let’s be amazing for our customers. Let’s be the best team players in the world. Let’s execute and produce results we can be proud of. Let’s win.” Go team.
Finally, Flannery has tamped down expectations, saying that the second-quarter results — $1.368 billion, 15 cents per share, of net income on revenues of $29.6 billion — will be tough to beat for the rest of the year.
He is conducting an “operational review” through November, which should reduce short-term pressure to turn GE’s lemons into lemonade. But if he can’t find answers, both the dividend and GE’s very existence could be under threat next year.
Pessimism Abounds
For a contrarian investor, this is good news. If you believe in Flannery’s potential as an executive, the stock is dirt cheap. GE trades at a steep discount to peers such as 3M Co. (NYSE:MMM), United Technologies Corp. (NYSE:UTX) and Honeywell International Inc. (NYSE:HON). That dividend, if Flannery can maintain it, represents a yield at current prices of 3.8%, solid gold for income investors.
There are also some good pieces in Flannery’s hand. GE Aviation alone has a backlog of $150 billion in orders. Flannery himself was running GE Health before his promotion, and the company’s Predix cloud should soon start delivering results.
Bottom Line on GE Stock
Investors are constantly told to buy low and sell high, but such discipline is hard to maintain with analysts who pound the table for hot stocks and tell investors to dump cold ones.
Right now, GE is a cold one: Its Relative Strength Index, or RSI, says the shares are oversold. Uncertainty over the future is high.
But the company does have a collection of excellent assets, and the leader who got the ship onto the rocks is off the bridge. There is a new captain, and if you think he can keep the old ship afloat now would be the time to climb on board.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
