Ignore GE Earnings, But Consider Making a Long-Term Bet on GE Stock

General Electric's earnings are less important to owners of GE stock than the turnaround plan of the company's new CEO

The speculative bull case for GE stock

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General Electric (NYSE:GE) will release its earnings tomorrow, but for once GE earnings will be irrelevant to GE stock.

Analysts on average are expecting earnings per share of 21 cents. More optimistic Street players are hoping for 23 cents which would be about twice the company’s 12 cent per share dividend. The dividend yield of GE stock has now reached nearly 4%.

But even if GE eliminates its dividend or reports a loss, GE stock probably won’t be knocked off its stride for very long. Given the current market cap of $102 billion of General Electric stock and the company’s $120 billion in sales, the shares look dirt cheap if the company is about to turn itself around.

Speculators have been buying GE stock all month and whispering two magic words to one another. Those words are Larry Culp, the name of GE’s new CEO.

The Danaher Experience

Before moving to Boston to join the Harvard Business School faculty, Culp turned Danaher (NYSE:DHR) into a major company and became a legend among long-term investors.

Culp made his reputation running Fluke, which Danaher had bought in 1998. He embraced the Danaher Business System model of his mentor, George Sherman, and subsequently succeeded Sherman as the company’s CEO.

Culp had joined Danaher, based in Washington D.C., in 1990, right after getting his MBA from Harvard. He became CEO in 2001, when he was just 37 years old. Over the next 12 years, he turned the company into a giant, buying and turning around smaller industrial technology companies. Culp was making $100 million per year before he left in 2014.

Investors did extremely well during Culp’s tenure as CEO. The stock rose 410% during his time at the helm, and the company’s dividend surged 500%.

Where Does GE Go From Here?

Culp’s predecessor at GE, John Flannery, pursued a common turnaround strategy after inheriting the mess Jeff Immelt left. He tried to raise money to reduce the company’s $100 billion debt mountain by selling what worked. Meanwhile, Flannery attempted to fix the GE Power unit that no one wanted. But Flannery, who previously headed GE Health, wasn’t a power guy, and the operational problems of the unit eventually overwhelmed him. 

Culp took a $23 billion non-cash write-off on GE Power upon becoming CEO. Flannery was preparing to spin off GE Health and sell GE’s majority stake in energy equipment provider Baker Hughes (NYSE:BHGE).

But Culp may try to make GE the next Danaher, with GE Healthcare as its centerpiece. GE’s Boston headquarters could prove to be a good venue for a health technology outfit.

In any case, Culp is seen as an internally-focused, operations-oriented manager, rather than an outwardly-focused strategic thinker. Kieran Murphy, the head of GE Healthcare who had been tasked with leading the spin-off of the unit and is credited with helping make it a technology leader, may be a good partner for him.

The Bottom Line on GE Stock

Despite all its problems GE still had $13.4 billion in cash on its books in June. The Power write-off will dramatically reduce the company’s asset base, which amounted to $109 billion in June, but the write-off gives Culp a clean sheet of paper with which to work.

If Culp adds a few pieces here and there to GE Healthcare, uses the proceeds from the sale of Baker Hughes to reduce debt, dumps GE Power and focuses on cutting-edge technology, his changes won’t generate a positive return for some time.

But if you’re a patient speculator, GE stock may be worth looking at.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.

Article printed from InvestorPlace Media, https://investorplace.com/2018/10/ignore-ge-earnings-but-consider-making-a-long-term-bet-on-ge-stock/.

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