He certainly said all the right things, and, he said them in the right way … Now, just because General Electric (NYSE:GE) CEO Larry Culp can make investors feel good, it doesn’t necessarily mean Culp can produce results that will drive GE stock higher.
Boiled down to its most basic form, that’s the crux of the debate surrounding General Electric stock right now, following Tuesday’s release of Larry Culp’s first letter to owners of General Electric stock.
The message was long on ideas and goals. Yet, it was short on specifics regarding how he may actually be able to lead GE out of perdition and back to its former greatness.
The market is patient with the company right now, but that won’t be a permanent condition.
The Math Is the Math
It was, by and large, a typical letter to shareholders, cheering the good, acknowledging the not-so-good, and painting a picture of a bright future that will focus more on the customer and improving the balance sheet.
It also means little in the grand scheme of things, as most CEO missives to the market do.
That doesn’t mean investors didn’t respond. They loved it, and had they not propelled GE stock up to the tune of 10% on Monday following news it was selling its biopharma unit to Danaher (NYSE:DHR), they may have been willing to pour in again in a big way. Still, up more than 50% from its December low, clearly the crowd believes in GE again.
Not the whole crowd though.
J.P. Morgan analyst Stephen Tusa is no stranger to being in the minority. Good thing too. His price target of $6.00 for GE stock is not only well below the stock’s current price near $10.70, it’s also the lowest target sported by Wall Street’s pros.
And yet, Tusa’s view of General Electric may be the most sound, and least swayed by hollow hope.
“At this stage of the game, the math is the math,” says Tusa, who believed GE’s free cash flow for the current year will be in the range of $1.5 billion to $2.0 billion. Tusa goes on to explain, however, “I can tell you right now, that $10 per share does not reflect where fundamentals currently stand.”
“They are giving a massive amount of benefit to a significant swing in Power, from negative $3.0 billion in free cash to probably about $1.0 billion(+) in free cash over the next three years,” continues Tusa, who adds “and they are also assuming that GE Capital is zero [in free cash flow]” when the company’s capital arm is still bleeding cash.”
Tusa doesn’t think the company’s Power arm will flip to profitability that quickly. He also points out “GE Capital is not a zero [in terms of cash burn]. GE Capital is a substantial negative … [with] significant drags over the next couple of years.”
While not intended to be a shot against Culp or his plan (Tusa likes and respects Culp), the analyst’s response did resonate with more than a handful of investors that re-read Culp’s letter. The goals were compelling.
They just weren’t accompanied by a plausible plan to meet them. What does “We are investing in high-tech industries where we have large, mission-critical installed bases with high potential for aftermarket services and parts” mean, exactly?
It’s not a damning indictment of the company or GE stock. A letter from a CEO to shareholders isn’t the proper forum to lay out specifics about a plan of action anyway. Those matters are generally dished out in pieces, as they become relevant. They’re also often concealed to prevent competitors from disrupting those plans.
General Electric isn’t an Apple (NASDAQ:AAPL) or an Nvidia (NASDAQ:NVDA) though, which would benefit from such top-secret initiatives. GE is an open book. The market knows it’s got too much debt, not enough cash flow, and too many lingering liabilities with its Capital arm. Its Renewable Energy division holds promise, but its growth outlook is best measured in years, if not decades. Its Aviation arm is impressive, but that’s a crowded field.
If there was ever a time to talk about specifics beyond ‘fewer, more impactful priorities,’ Culp’s letter to investors would have been it.
Reality Check for GE Stock Holders
Or, perhaps the lack of details is a subtle hint of something else … that there are no details to speak of. It’s a premise that typically doesn’t fly on neither Wall Street nor Main Street. Investors love certainty and abhor ambiguity.
When it comes to GE, however, there is no elegant grand plan investors can readily latch onto.
The only plan to speak of right now is selling assets until its debt bomb has been defused, and to hang on for dear life while it figures out how to collect more in revenue than it spends. There’s nothing elegant about bailing water out of a boat. Speed is the key; the patch job tends to be ugly.
Nevertheless, Larry Culp is still one of the most qualified — if not the most qualified — to lead that bailing and patching before GE sinks to the bottom of the ocean. If nothing else, his calmness and coolness provide a glimmer of hope.
Let’s see if the market is as optimistic about Culp a year from now, when the company has to start improving cash flow with its remaining pieces. By that point, GE stock owners should start demanding the product-based and service-based specifics that are missing thus far. If they don’t get them then …
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.