Founded in 1892, General Electric (NYSE:GE) has been a symbol of America’s strength. But over the past few years, the company has, instead, been a symbol of horrific management. Just imagine how bad things would have been if the global economy were in trouble?
Well, for the year so far, the GE stock price is off a gruesome 49%. The shares were also dropped from the iconic Dow Jones Industrial Index (the company had been on it since 1907). To put things into perspective, during the early 2000s, General Electric stock was actually the most valuable Dow stock.
OK, the company is taking moves to get things back on track. To this end, it has named Larry Culp, who was the former head of Danaher (NYSE:DHR), as the new CEO.
All in all, he looks like the right pick. But, then again, it will likely take quite a while to restructure the operations — which means GE stock could languish for some time. So let’s take a look at the biggest challenges:
GE Stock: Liquidity
Culp has tried to calm the fears of investors, saying that GE does not have liquidity problems. Yet, his actions indicate the opposite. The dividend was slashed to 1 cent a share and Culp is rushing plans to unload GE’s position in Baker Hughes (NYSE:BHGE). He has also made it clear there will be more spin-offs and asset sales.
It’s true that GE has access to about $40 billion in credit lines — which should alleviate the pressures. But the overall debt level is still at $100 billion. There are also uncertainties about contingent liabilities, such as with the insurance business.
Bond investors are certainly concerned about the situation, as GE’s fixed-income securities have been dropping. S&P, Fitch and Moody’s (NYSE:MCO) have dropped their credit ratings to a mere three notches above junk levels. This means it will get more expensive for GE to borrow.
In light of all this, analysts at JPMorgan (NYSE:JPM) recently issued a stinging report. They think that there is still considerable downside with GE stock and dropped the price target from $10 to $6.
GE Stock: Power Business
Once a strong driver, the power business for GE has turned into an albatross. Take a look at the latest quarterly results. Revenues plunged by 33% to $5.74 billion and the unit posted an operating loss. While Culp believes that the business is close to a bottom, he still says there could be further deterioration.
To deal with this, Culp is focused on slashing costs, with this year’s reductions at $700 million. But there will need to be much more.
Besides, GE will have to find ways to improve the operations. Keep in mind that the company has had problems with its turbines, which has cost it business. Finally, the overall market environment is far from robust. The bottom line is that it will probably take at least a couple years to turn around the power business.
GE Stock: Distractions
Culp is not in an enviable position. GE is a massively complex organization, with many moving parts. Even a skilled CEO could easily make a couple wrong moves, which would derail the restructuring.
There are also many distractions. For example, GE is under investigation from the Securities and Exchange Commission (SEC) and the Justice Department because of accounting policies. Such things can be a major drain on senior managers’ time.
Meanwhile, GE will still need to fight strong competitors like Honeywell International (NYSE:HON) and United Technologies (NYSE:UTX). Even Siemens has been getting traction lately. So, with GE scrambling to fix its tough problems, its rivals will waste little time capitalizing on this by focusing on growing their own businesses.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.