In breaking down General Electric (NYSE:GE) into its most profitable segments, CEO Larry Culp has lost the scale needed to retire its debt. Since becoming CEO last October, Culp has turned around operations. Unfortunately for investors, there’s been no turnaround in GE stock, which is down almost 9% under the new CEO.
Regarding those operations, in GE’s first quarter report the only unit not showing a profit was renewable energy, where a new conservative government in Ontario canceled hundreds of wind power contracts.
The problem is that a company running at $110 billion in annual revenue is going to have a hard time ever retiring $105 billion of borrowings, and almost $74 billion more in “other liabilities” — mainly pensions and long-term care costs.
Once upon a time, GE Capital could have dealt with these issues. But previous CEO Jeff Immelt sold off assets to cover up what he was doing elsewhere. Now the numbers don’t add up.
Victim of Clean Energy
Immelt made two contradictory bets.
He bet on renewable energy, including efficiency, and he bet on fossil fuel energy, in the form of oilfield services and turbines. He doubled down on that bet by buying Alstom in 2015, calling it the “best deal in a century” because, at the time, the French turbine maker had a $50 billion order backlog.
Then efficiency cut demand, the costs of wind and solar energy plummeted, and the backlog for turbines running off natural gas disappeared. But GE is still in the fossil fuels business, a business even JPMorgan Chase (NYSE:JPM) analyst Stephen Tusa says is in “secular decline.”
Renewable energy is a capital goods business. Once a turbine or solar panel is in place and paid for, further energy from it is practically free. The only revenue coming from it is service revenue or replacement, at a much lower cost (because technology creates efficiency). Fossil fuels, on the other hand, are burned and must be continually replaced. The business models are as different as the proverbial night and day.
GE stock is somehow up 46% so far in 2019, closing trading on July 2 at $10.62 per share, giving it a market cap of $92.6 billion. That may be because GE publicists have been spinning Culp as a heroic genius with an “inner Jack Welch,” referring to the man who built GE as a finance and entertainment powerhouse in the 1990s.
But even Jack Welch couldn’t spin GE’s straw into gold. A deal to sell GE’s biopharma unit to Danaher (NYSE:DHR) for $21.4 billion — where Culp was once CEO — buys time, but that’s selling the family silver to keep up maintenance on a mansion that’s become a money pit. Worse, that deal is now threatened by the trade war. If Danaher tries to negotiate a discount, it’s in a strong position. But what would that do to investor sentiment in GE?
Culp has ended a long-standing patent fight with Vestas, its wind turbine rival, and is closing a natural gas plant in California, which will become a battery storage warehouse. JPM’s Tusa worries that the end of renewable energy tax credits next year will now cause the wind power unit to decline.
Bottom Line on GE Stock
Just when Culp — and GE stock investors — need his successes to keep succeeding and his losers to turn around, the opposite is happening. The Boeing (NYSE:BA) 737-Max mess is hitting results at GE Aviation. The unit may now be worth as little as $30 billion, Tusa thinks. Brazil is taking GE transformers off-line because they have a habit of blowing up.
Culp is beginning to remind me of a loyal henchman given command of the evil genius’ lair after James Bond has set the auto-destruct. Saving GE may be a hopeless task.
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 email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in JPM.