Going into its “Investor Day” meeting, many people were anticipating bad news from General Electric Company (NYSE:GE). It was worse than they imagined.
The dividend cut, from 24 cents to 12 cents, wasn’t the worst of it. GE also cut its earnings and cash flow estimates for 2018 even more than analysts had expected. The company now hopes to earn $1.00-1.07 per share in 2018, and deliver just $6-8 billion in cash flow for the year.
All this was announced to get the bad news on GE behind it, and put a growth platform in place.
The reputation of former CEO Jeff Immelt, once among the most widely respected CEOs in America, was thoroughly trashed, with successor John Flannery admitting Immelt bought things like power systems and oil at the top, and sold things like entertainment and finance at the bottom.
All the Bad News
The market’s response was muted, the stock falling just 3.7%, to $19.73, in the first hour of trading. As Flannery spoke, CNBC talking head Jim Cramer savaged the company, saying that it should be trading at $17 per share, even though he said his charitable trust owns it. He called the cash flow estimate wildly optimistic.
At $20 per share, he said, the company is trading at a premium to such names as United Technologies Corp. (NYSE:UTX) and there is no justification for it. It could take two years for Flannery to deal with GE’s pension and debt problems, so why should it trade at a higher multiple to earnings than Apple Inc. (NASDAQ:AAPL)?
In his presentation Flannery said the company would be focusing on its aviation, power and healthcare units, all using the Predix cloud technology, which lowers service costs, selling as much as $20 billion in assets and creating “optionality” for Baker Hughes, a General Electric Co. (NYSE:BHGE), which could lead it to exit its majority stake in the company as oil prices improve.
Flannery said managers will participate in the belt-tightening, sacrificing cash bonuses for long-term performance in favor of stock. The corporate jets will be sold, and there will be “comprehensive changes” to the company’s compensation plan for employees.
Where To From Here?
By getting all the bad news out, by promising comprehensive change, by trashing Immelt, Flannery hopes to put a period under that era of the company and get a fresh look from investors.
But what would they get getting? The company Flannery will build from is still the company Immelt built. Bad acquisitions like Alstom and Baker Hughes will be tough to ditch at any price, and Flannery could only offer to “evaluate alternatives” on Immelt’s biggest losers.
Even GE Health, the company Flannery ran before becoming CEO, is going to take a hit, making fewer acquisitions, focusing on ultrasound machines and life sciences, taking cash out instead of putting it in while the rest of the industry is still investing.
Bottom Line on GE Stock
Flannery has a tough turnaround task in front of him. As he spoke, there were still more analysts recommending investors buy GE stock than sell it.
Flannery’s message was that the company has fallen about as far as it will, but it hasn’t. The turnaround, if it happens, will take years to materialize. Flannery is making all the right moves, but the company may still be overvalued at $20 per share.
I managed to get out of GE early this year when the stock was selling in the low $30s. A long-term investor might be interested in it around the mid-teens, a 50% drop from where it stood at the start of the year. GE’s stock price is still too high.
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 firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.