Suddenly, it seems, everybody hates General Electric Co. (NYSE:GE).
Investors should have gotten a hint in June when long-time CEO Jeffrey Immelt said, quite suddenly it seemed, that he was stepping down in favor of GE Health head John Flannery.
Immelt’s ascension in 2001 had gone like a royal parade, with predecessor Jack Welch publicly comparing him to James McNerney, who wound up at Boeing Co. (NYSE:BA), and Robert Nardelli, who wound up going to Home Depot Inc. (NYSE:HD) and then Chrysler. Analysts now believe Welch should have gone with McNerney, whose reign at Boeing increased its market cap by $50 billion.
It is also apparent, in hindsight, that Immelt himself was a disaster. Since Immelt announced his departure GE shares have been falling steadily and opened for trade September 8 at $24 per share. They were near $60 when Immelt came in and are now at levels last seen in 2013.
Even Warren Buffett of Berkshire Hathaway Inc. (NYSE:BRK.A) has thrown in his hand and taken the losses.
Things at General Electric Didn’t Get Better
Some of the fall resulted from Flannery’s own analysis of the company upon taking over, deciding he needed to cut jobs. It’s like a big-time football coach blaming the players he inherited for an early loss. Kick the guy who’s out the door for what you have and then build from there. Expect that when the third quarter numbers come out next month.
But some analysts now think Flannery is sugarcoating it. JP Morgan Chase & Co. (NYSE:JPM) says $24 is a ceiling for the stock, not a floor. Free cash flow is low, Stephen Tusa wrote, the resulting valuation is high, and there is little he can see that might change the narrative. He gave the stock a price target of $22 per share.
Despite all his talk about renewables, Immelt’s company was wedded to fossil fuels, and the 130-year-old company’s pension obligations are huge. The same number of analysts now say hold the stock as say buy it.
Other problems should have been obvious, even to Immelt. He saw Predix, General Electric’s Internet of Things cloud software, as requiring its own data centers to work, to isolate that traffic from hacker attacks.
Now, seeing the cost of reinventing that wheel, chief digital officer Bill Ruh has “pivoted” and will use the Amazon.com Inc. (NASDAQ:AMZN), Microsoft Corp. (NASDAQ:MSFT) and Alphabet Inc. (NASDAQ:GOOGL) clouds, like everyone else. But if GE is using the same clouds as everyone else, why should industrial companies use a proprietary system like Predix?
Blood in the Streets for General Electric?
It’s said that you don’t want to grab a falling stock until there’s “blood in the streets,” until all the negativity has been washed out of it. Is that true for General Electric?
Our Richard Saintvilus thinks so. He believes Predix revenue could hit $14 billion by 2020, more than 10% of GE’s current $120 billion per year run rate.
Flannery will announce his detailed plans for a turnaround in November, and getting in ahead of that could deliver gains, notes Vince Martin. GE is not dead yet, and at current prices its dividend delivers a 4% yield.
Bret Kenwell also finds GE’s forward Price-to-Earnings ratio of 14 low, expecting earnings to grow 5-8% over the next two years. If it does fall to $22 per share, as JP Morgan thinks, it will be attractive again.
Even then, GE will be a stock for income investors only. A $120 billion industrial company is a huge battleship. It will take time to turn.
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 shares in MSFT and AMZN.
