John Flannery took over as the new CEO of General Electric Company (NYSE:GE) this month, replacing embattled predecessor Jeff Immelt.
Flannery talked a big game in an internal letter to the industrial conglomerate’s 300,000 employees, vowing improved focus on customers and “better execution” on cash and margins.
But Flannery’s words did little to move GE stock.
GE Stock In Freefall
With GE down more than 12% in the past three months and hovering near 52-week lows, you would think a pep talk from the new CEO might be enough for at least a modest bounce-back in the stock. Apparently not.
It’s the latest sign that investors are growing increasingly wary of General Electric’s promises, and need to see real improvements before buying back in. It’s no coincidence that institutional ownership in GE stock has fallen from 64% to less than 59% in the previous year, a time when the company has produced three straight quarters of sales declines.
Platitudes like focusing on customers, working more as a team and executing better sound nice in a generic sort of way, but they don’t excite investors. Better sales would help, as would more consistent profit growth and higher margins. Above all, GE needs some direction.
Having shed its banking business (GE Capital) and in the midst of selling its signature lighting business, General Electric is in a bit of an identity crisis. It wants to be an industrial conglomerate with a focus on tech, but it’s more known for things like aviation, oil and gas and healthcare. In essence, GE has become a jack-of-all-trades, master of none.
You could blame that on Immelt. After all, in Immelt’s nearly 16 years at GE’s helm, GE stock lost more than a third of its value, at a time when the Dow Jones Industrial Average more than doubled. Sixteen years of that kind of drastic underperformance is a difficult trend to reverse, even with a change at the top.
It’s Flannery’s job to help General Electric figure out what it will be going forward, and it will take more than a few encouraging words. Fortunately, Immelt didn’t leave the cupboard completely bare.
Some good news is on the horizon: sales are expected to improve this year, which would mark the first time the company has pulled off back-to-back years of annual revenue increases since before the recession. Profits are also expected to improve for a second straight year.
GE Needs to Prove Itself
Meanwhile, by selling its lighting business, General Electric should bring in some sorely-needed cash and trim some fat by ridding itself of its fastest-declining (-35% sales last quarter) unit. Those incremental improvements should at least stop the bleeding for GE stock, and perhaps spark a meaningful turnaround.
But I wouldn’t go investing in GE on a wing, a prayer and John Flannery’s rah-rah speech. Like General Electric itself, GE stock needs to prove itself to be worthy of your portfolio.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.