General Electric (NYSE:GE) stock has surged since the surprise announcement that H. Lawrence Culp, Jr. would replace John Flannery as CEO. A slow trickle of negative surprises defined the 14-month tenure of Mr. Flannery. GE stock lost more than half of its value during this period. GE hopes that Mr. Culp, who holds a reputation as a turnaround expert, will be able right the ship.
However, investors should wait until at least the first earnings report before jumping into GE stock.
Mr. Culp, the former head of Danaher (NYSE:DHR), has become the first outsider in GE history to become the company’s CEO. He holds a strong reputation as a turnaround expert, having increased the revenues and market cap of Danaher by five-fold during his 14-year tenure.
Whether he can accomplish the same thing at GE remains unclear. However, the goodwill write-down of $23 billion shows signs that the trickle of bad news that has plagued GE for over a year could finally be ending.
By most accounts, GE appeared to have become drunk with excess during the Jeff Immelt era. Mr. Immelt inherited the world’s largest company when he became CEO in 2001. He left it a smaller, financially troubled enterprise when John Flannery took over as CEO in August 2017.
Mr. Flannery may have inherited a mess. However, if drunkenness defined the Immelt era, Mr. Flannery’s needed to both induce and pull GE through a hangover phase as quickly as possible. Instead, Mr. Flannery’s time at GE came to be defined by one shoe after another dropping. Weary of the slow trickle of bad news and the lagging performance of GE stock, the board removed him.
3 Things That Will Boost GE Stock for the Long Term
First, Mr. Culp needs to end the stream of negative surprises. Hopefully, he will openly address all of GE’s problems quickly and assure investors that the hangover phase will soon end. While GE stock has responded positively to the change at the top so far, investors still don’t know whether more bad news needs to come to light.
Second, Mr. Culp also needs to return GE to a pattern of confidence and stability. Only three men held the CEO position at GE between 1972 and 2017. Today, three different men have held the CEO job in the last 15 months alone. If Mr. Culp cannot turn GE around and stay at least a few years, GE stock will likely struggle further.
Third, GE needs a more focused purpose as a company. With the planned sale of more non-core divisions, the company appears headed in this direction. The sum of the parts of the company are likely worth more than GE as it exists today. In today’s economy, running a company where different divisions operate in different industries has become difficult to manage. Taking GE back to its industrial roots would only benefit the company in my view and help it compete more effectively with Siemens (OTCMKTS:SIEGY) and other peers.
Wait for the Earnings Report Before Buying GE Stock
On paper, Mr. Culp appears well-qualified to steer the needed turnaround. Still, he has only held the position a short time, so short that he has not conducted an earnings report yet. That report will come out on October 25th.
In my view, investors should wait until at least this earnings report to take any action on General Electric stock. GE stock has moved higher by about 20% since Mr. Culp’s hiring. I expect the bump from the honeymoon phase will run its course soon. From here, Mr. Culp will have to produce results. However, if he can come close to the success he saw at Danaher, I believe GE stock will return to a long-term growth trend.
The Bottom Line on GE stock
Prospective buyers should wait for the next earnings report before opening a position in GE stock. Hiring Mr. Culp as CEO has reassured investors who had grown weary of the slow trickle of bad news that came to define John Flannery’s time in the position.
This surprise hiring of Mr. Culp led to a quick 20% increase in the GE stock price. But investors need more time to determine if the trickle of bad news has indeed stopped.
I agree that selling off non-core divisions and focusing on a few areas can only help GE. However, I think GE stock can see a long-term rise if (1) investors believe they truly know the full scope of GE’s problems and(2) they feel confident that Mr. Culp is the person to return General Electric to both stability and success.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.