General Electric (NYSE:GE) stock, once among the most boring names in the Dow Jones Industrial Average, is now facing constant danger.
It met earnings guidance for the first quarter but its asset sale to Danaher (NYSE:DHR) may be in trouble. Fears over its pension liability may be overblown but it has a grim future.
CEO Larry Culp is “the man for the job” but GE Power may take three years to recover.
General Electric is a great name, and Culp did a fine job at his previous post running Danaher. But this turnaround may be a bridge too far, and do you really want your money tied up in it?
Forget the Name General Electric
There is romance attached to the name General Electric, and over 130 years of history. In analyzing the company, you need to forget the history, or you’ll get lost.
Let’s call this company Culp Industries.
Culp Industries is a conglomerate with a market cap of $84 billion. It has $107.5 billion in “borrowings,” $36.8 billion of insurance liabilities and annuity benefits (from a failed effort in long-term-care insurance), and $32.9 billion in “non-current compensation and benefits” (mainly pensions). This leaves $35.2 billion for “shareholder equity” on the books, up from $31 billion a year ago.
Culp Industries consists of several businesses, some of which are doing well and some of which are doing poorly. The Aviation, Healthcare and lending businesses are doing well. The oil and gas business made a little money. The problems are in the power and renewable energy units, which make turbines and related equipment.
Culp can’t sell the problem children because their value is negative. Closing them would take out $7 billion in revenue and do nothing to reduce those liabilities. The Danaher deal trims the size of the healthcare unit but brings in about $21 billion. Apply that $20 billion to the balance sheet and it takes just one-fifth of the debt.
Questions for GE Stock
It’s the power unit that’s taking the whole company down. Respected JPMorgan Chase analyst Stephen Tusa says Culp “appears to be stopping short of telling the whole story” about the unit, which is losing market share. Cash flow for the unit is now seen as “significantly negative.”
There are more negative data points. General Electric continues to lay off workers, quietly moving jobs to India. The healthcare unit’s activities in Brazil could draw fines under the Foreign Corrupt Practices Act.
Culp is doing everything he can, short of changing his company’s name to Culp Industries, to make investors forget about the old General Electric. He’s turning over the board and has dumped plans to build a glorious new headquarters in Boston. Instead, the company will rent space.
I can’t imagine anyone doing a better job with the hand he has been dealt than Larry Culp. He has moved decisively to reduce cash flow drain, focused on operations that are making money, and created a new attitude for GE stock.
If the oil and gas unit, Baker Hughes (NYSE:BHGE), has a winner in its “electric fracking” equipment, more good news could be on the way. BHGE stock is doing better than rivals Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL), but its value is still down by more than one-third in the last year.
The Bottom Line
I wouldn’t buy Culp Industries here. There are green shoots, the CEO is doing what he can, but an economic downturn could sink the company’s big plans at any time — even at $10 per share.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear , available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in JPM.
