It took over a decade for former General Electric Co. (NYSE:GE) CEO Jeff Immelt to take down the legacy of his predecessor, Jack Welch. New CEO John Flannery is taking Immelt’s legacy down immediately. Whether it helps GE stock in the long term remains to be seen, but it very well may.
The 12,000 layoffs announced in the company’s power division on Dec. 7 are expected to cut costs by $1 billion, enough to keep the company afloat as Flannery constructs a new profit engine. The layoffs have some analysts calling the stock a big asset play that could jump 50% in value, with the aviation and healthcare units alone worth more than the company’s present $153 billion market cap.
Flannery is also hoping to keep the stock price afloat with insider buying. This includes 60,000 shares for himself and 55,000 for director Francisco D’Souza of Cognizant Technology Solutions Corp (NASDAQ:CTSH). It’s all designed to take the stink of failure off the company. But will it?
GE Stock, Coal and Natural Gas
The biggest, dumbest move made by Immelt was to buy coal and natural gas power generation companies like Alstom’s turbine business, on which he spent $10 billion in 2015. At the time that deal was called a “masterstroke,” boosting the company’s order backlog and international reach.
Now Flannery is having to extricate GE from that, and it will be expensive, especially given European labor laws. The layoffs are already creating angry headlines there, as the GE Power unit shrinks by 30%.
Cutting $1 billion in costs off a company doing $120 billion in business each year may not sound like much, but desperate times call for desperate measures. Cash losses came to $41 billion in 2016, and exceeded $21 billion for the first three quarters of 2016.
GE no longer has the huge cushion of GE Capital to absorb these blows, once so large it was declared “systemically important” during the 2008 market crash. That’s what Immelt sold off, in pieces, to buy the coal assets.
Flannery is also hoping to make Baker Hughes A GE Co (NYSE:BHI) more attractive, which may let GE get out, it still owns 62% of the unit. To that end BHI recently sold nearly $4 billion in new debt, which will be used to buy back older, high-interest notes and some of the common stock.
The resulting company is attractive, delivering about $5.4 billion in free cash flow over the next three years, on par with Halliburton Company (NYSE:HAL). If Lorenzo Simonelli, the executive running BHI, can engineer a profitable sell-off on rising oil and gas prices it could provide lift to the remaining company.
What’s Left to Know on GE Stock
The moves to extricate GE from the dying fossil fuel business and focus on things like airplane engines and health care could eventually pay off, but Flannery is also cutting there. Predix, the “industrial Internet of Things” unit Immelt promoted heavily, is being downsized as well.
Investor attitudes remain highly negative. Portfolio Grader recently called GE stock a “strong sell.”
But bottom fishers are starting to nibble on GE stock. Sentiment is overwhelmingly negative. The price to earnings multiple is approaching that of the market, at about 20, and earnings should be better in 2018.
I suspect there are some brave traders putting in long-tail calls on GE stock here, looking for a small bounce next year to near $20 per share. I’m not one of those traders. I focus on long-term investments, and if you are a long-term investor, someone with a 10 to 20-year time horizon, nibbling on GE shares here may pay off.
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 article.