Just like that, $100 billion industrial conglomerate giant General Electric (NYSE:GE) has a new boss, which has thrust GE stock into the spotlight.
On Oct. 1, General Electric unexpectedly and abruptly removed John Flannery as chairman and CEO. He had only been CEO for a year, but during that year, not much had been accomplished by way of a GE turnaround.
As such, Flannery was removed and former Danaher (NYSE:DHR) chief Lawrence Culp was named GE’s new CEO.
GE stock rallied on the news. Last week, the stock hit what essentially amounted to decade lows on concerns regarding the Power business. Now, GE stock is taking back some of those losses after this CEO change.
Is this a rally worth buying? Will new management right the ship? Is the worst over for General Electric stock?
Broadly speaking, the CEO change is a positive development for the stock. But, that doesn’t mean the coast is clear and it’s time to buy GE stock in bulk.
This company has strong fundamentals, a global brand and some wide-moat businesses with stable long-term potential. But, management, to-date, has failed to simplify the complex monster that is GE, stabilize the company’s losing businesses and effectively execute a GE turnaround.
The market is expressing optimism that those things can get done under Culp. But, the market expressed similar optimism when Flannery replaced then GE CEO Jeff Immelt in 2017. At the time, General Electric stock was $30. Today, it trades hands at under $13.
In other words, don’t get too excited about GE stock because of this CEO change. It is a positive development. But, it would be wise to wait and see how things play out over the next several months before buying this stock in bulk.
GE Stock: A Change Was Needed
There’s no doubt about it. This CEO change was long overdue.
Sure, Flannery only held the job for a little over a year. But, during that year, there was no GE turnaround. The bleeding on GE didn’t stop. If anything, things only got worse. There were hopes and dreams of asset divestitures that would lead to a slimmer, more focused, more stable and more profitable GE. But, those dreams never fully materialized. Instead, the Power business continued to spiral out of control, the GE conglomerate remained one confusing mess and profitability continued to erode.
GE stock reflected this reality. Last week, the stock was trading at essentially decade lows.
New leadership was needed at GE. This company has a lot of valuable underlying assets, a powerful global brand image and a few wide-moat businesses with stable long-term growth prospects. If the company slimmed down and focused on its winning businesses, there is an argument for GE stock to get to $20 in two years. But, under Flannery, GE wasn’t doing what it needed to do to realize that potential.
Thus, the CEO change is a positive development for GE stock.
The Best Approach? Wait and See What Happens
Positive developments, however, aren’t always the best buying opportunities.
The new CEO, Lawrence Culp, seems more than adequate. He formerly led medical device company Danaher from 2000 to 2014. During that stretch, Danaher increased its revenues and market cap five-fold. His success at Danaher has Culp widely regarded as one of the top CEOs in the world.
Thus, there is reason to be excited about Culp leading a new era at GE.
That being said, such optimism should be tempered in the near-term. There was also a fair amount of optimism on Wall Street when Flannery took over the CEO job in June 2017 from Immelt. But, that optimism was short-lived, and a mini up-trend in General Electric stock was overturned by a much more powerful secular down-trend.
The same thing could happen this time around. There are no guarantees this mini-rally leads into anything bigger in the near-term. If anything, history says this rally should be faded.
Longer-term, this could be the beginning of a reversal for GE stock. But, investors would be wise to wait and see how Culp handles the situation at GE, and how he executes on extracting optimal value from the company’s underlying assets. Until the numbers support Culp’s turnaround strategy, the market will have a tough time pushing up GE stock.
Bottom Line on General Electric Stock
A new CEO means that GE stock has morphed into a “wait and see” situation. Wait for the new CEO to announce turnaround plans. See how the numbers turn out in response to those turnaround plans. Then, make a decision on whether to buy GE stock.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.