New General Electric (NYSE:GE) CEO Larry Culp is finding that the mess he inherited from onetime CEO Jeff Immelt is even worse than expected, but GE stock has seen something of a rebound.
In discussing 2018 results he was able to offer specifics on keeping the aviation finance business, spinning out what he has to, and changing the corporate culture through management and layoffs.
But on GE Power had less useful things to say. The fact is that GE Power, mainly built around turbines, generators and boilers, is still a black hole of losses, one Culp has yet to reach a center of. Until he can quantify those losses, cauterize them, and end them, it’s hard to see what GE is worth or even if it can be saved.
The Problem with GE Stock
The problem is that the huge contracts with enormous backlogs Immelt deluded himself about, and continues to delude himself about, as our Tom Taulli noted recently, committed GE to a future built around fossil fuel energy where demand is rolling over, built on a mountain of debt.
Immelt should have known this, since GE also has a large renewable energy business and much of the work at its technology unit was aimed at energy efficiency. He just ignored it, claiming growth where there was industrial rot, and refusing to get into the operational weeds.
To his credit, Culp has gotten into those weeds. He will spin off the transportation business as Wabtec later this month, he’s cutting Power’s management overhead, and he has laid off 15% of the GE Power workforce, 10,000 people.
But there still legal settlements to be dealt with, and “legacy project erosion,” presumably business Alstom said it would be doing profitably when it was bought in 2015 that amounts to dead loss. Then there’s what Culp’s team calls the effect of “long-term receivables factoring,” the way Immelt’s team booked future revenue that didn’t come in.
“Fixing Power will take time,” Culp concluded. That’s the understatement of the decade.
The Bull Case and GE Stock
People who are bullish on General Electric’s future, and this is a company that did over $113 billion in business last year, point to GE Aviation, the jet engine unit that is still doing great. They point to asset sales. They also point to the all-important free cash flow. This is supposed to fill the “liquidity hole” of its enormous debt, including $110 billion in “borrowings” and $75.4 billion of “other liabilities.”
GE Power “will begin to recover” this year, the bulls say. The rest of the business will do better under Culp’s customer-focused, detail-oriented management.
That’s all true. But it doesn’t justify a rise in the stock price of 27% over the last three months, to about $10.35 per share, its opening price Feb. 14. That’s a market cap of $90.2 billion for a company that isn’t growing, whose dividend has been chopped to a penny per share, and whose capital position is as precarious as that of the U.S. government, only without the power to tax and print money.
The Bottom Line on GE Stock
Immelt often acted like GE could indeed print money, selling off GE Capital, the crown jewel of the Jack Welch era, considered “systemically important” as late as the 2008 financial crisis, piece by piece.
It’s nearly all gone.
Culp now must deal with what GE has, a black hole in Power, debts out the wazoo, and legal obligations like pensions and long-term care policies from ages ago.
I really want Culp to succeed, but I can’t put my money into that until the black hole of power is fully dealt with.
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.