Ask ten different investors what General Electric (NYSE:GE) CEO Larry Culp has to do next to reignite the rebound effort from General Electric stock, and you’ll likely get at least five different answers. And all five will be correct. There’s a lot about the old industrial icon that needs to be fixed.
But, there’s one overarching goal ahead that will put General Electric proverbially back in business and meaningfully drive the GE stock price upward in a big way. It’s not necessarily the one you would think.
Chicago Booth Prof. James E. Schrager believes the next stage of the turnaround will be less about the assets the company is selling, and more about the growth engines GE ends up buying.
Phase One Slowing Down
It’s not the discussion that’s surrounded GE of late. Rather, in an effort to whittle down what has turned into debilitating debt burden, General Electric has been shedding assets. In February, the company announced it would be selling its biopharma unit to Danaher (NYSE:DHR) — Culp’s former employer — right around the same time General Electric completed the sale of its locomotive business to Westinghouse Air Brake Technologies (NYSE:WAB).
Those and several other divestitures have mostly accomplished their purpose. That is, cash flow and earnings appear to be on the mend, given last quarter’s earnings beat and surprisingly healthy guidance.
Although the company warned General Electric stock owners earlier in the year that cash flow would remain negative for some time, a handful of analysts were quick to remind the market that it will take more than a year for GE to dig its way out of the deep hole it dug itself into. GE was and is on the right track.
But, investors already broadly do buy stocks (or at least should) for where that company will be more than a year down the road. That’s where things look promising for General Electric again.
Get Ready for the Next Phase of GE Turnaround
In August, James Schrager, PhD, laid out the underpinnings for what ultimately went wrong at GE. The paraphrased version of his take: General Electric failed to recognize its markets would evolve, and as such, didn’t appropriately plan to replace aging businesses with new ones.
His viewpoint is a valid one that should be heeded. Schrager has been a professor of entrepreneurship and strategic management at the Chicago Booth School of Business for over twenty years. He watched General Electric turn into a powerhouse under Jack Welch’s tutelage between 1981 and 2001, only to watch the company deteriorate into the mess it has become today under a string of other CEOs that weren’t Jack Welch.
That’s not to suggest Welch would have fared any better than Culp’s predecessors John Flannery and Jeff Immelt would have had he remained on as chief executive. But, Schrager does credit Welch for knowing what Wall Street wanted, and how he made that happen.
“To grow GE,” Schrager explained last month, “he [Jack Welch] embraced the idea of buying companies to increase earnings, but not just any deal. Instead, the search was on for businesses ranking first or second in industries with only three of four players. No turnarounds, no roll-ups, no startups here. He set his sights on companies with dominant positions in their markets.”
The idea jibes with Dr. Schrager’s August assessment that the “most successful corporate strategies are those that enable companies to be nimble and flexible, and to pivot when things are not working or when unexpected opportunities arise.”
To that end, Schrager is “wary but optimistic” that Culp’s time at Danahar means he has enough insight about how to sell and buy businesses.
Looking Ahead for General Electric Stock
It won’t be easy. General Electric is still technically in divestment mode — the first stage of Schrager’s model — and also working on the second stage that calls for an overhaul of internal processes. Adding new growth engines to the mix not only complicates matters, but will mean Culp and his team have a massive amount of concurrent work on their plates.
It’s also arguable that a wide swath of owners of General Electric stock won’t be thrilled about adding debt back to the balance sheet or issuing GE stock as a means of financing deals.
There’s also the not-so-small question, what should GE buy?
The corporate world is as competitive as it has ever been, and plenty of General Electric’s rivals are essentially going for GE’s jugular, kicking it while it’s down on hopes they can deliver a knockout punch. Culp can’t afford to let that happen, even if that means going on the offensive while it’s still just learning to play defense.
As Schrager concludes, “The story is far from over, but keep your eye on his plans for getting GE growing again and you’ll be looking in the right places.”
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.