About a year ago, Larry Culp came on board General Electric (NYSE:GE) as CEO to focus on a major turnaround effort (he was the first outsider to take the helm in the company’s 127-year history). He certainly had the right background to take on the challenge. GE stock investors had high hopes.
Why? His prior stint was as the CEO of Danaher (NYSE:DHR), which was another conglomerate, one which many investors and analysts saw as a model for such companies. He demonstrated a shrewd ability to allocate resources and focus on growth opportunities. Danaher stock showed total shareholder return of 465% under Culp’s lead, compared with about 105% for the S&P 500 index during the same period. Under him, the company’s market value grew to $50 billion from $20 billion.
But as for GE, the challenges have been enormous and complicated. The fact is that the company’s prior CEO, Jeffrey Immelt, was a poor leader. He made several major blunders, such as with deals for companies like Alstom.
The result is that the GE stock price saw staggering losses. The market cap got whacked any number of times. Thomas Edison’s stalwart enterprise was booted out of the Dow Jones Industrial Average and the dividend was pared to four cents a share.
The Second Coming of Culp
Since Culp came on the scene, the performance of General Electric stock hasn’t improved. For the past year, GE stock has lost about 25% or so of its already-depressed value.
But despite this, I think Culp has made the right moves. He has wasted little time in trimming back costs and instituting layoffs. Culp has also made the painful decision of freezing the pension plan, which affects 20,000 retirees — there will instead be a focus on 401(k) plans. The move should result in a drop in the debt load by $4 billion to $6 billion.
Besides this, Culp has also been swift in unloading assets, such with the spin-off of Baker Hughes, a GE Company (NYSE:BHGE) as well as the sales of the locomotive business to Westinghouse Air Brake Technologies (NYSE:WAB) and the biopharma unit to DHR. All this has been critical in lowering the massive debt load, which is now at $90 billion.
Yet it’s important to realize that the turnaround is still in the early phases. And more importantly, Culp has a lot remaining on his plate.
For example, the liability structure is a major overhang. Keep in mind that General Electric stock has the risk of $56 billion in “other long-term liabilities.” These include the legacy pension obligations and the problems with the long-term care insurance business. True, it helps that interest rates are at low levels. But the payments and obligations are still a drain on resources.
Next, the aviation business — while it has been a crown jewel for General Electric stock — it is also coming under pressure. One problem is that impact from Boeing’s (NYSE:BA) efforts to deal with the grounding of the 737-MAX.
Note that JP Morgan (NYSE:JPM) analyst Stephen Tusa estimates that the aviation business is worth about $30 billion, compared to the consensus Wall Street valuation of $100 billion. Tusa also has a price target on General Electric stock of a mere $5.
Although, I think the biggest headwind for the company is the global economy. Growth is decelerating in Asia and Europe (with recessions already underway in Germany, among other place). And yes, the U.S. economy is also showing weakness.
This is certainly ominous for General Electric as the company’s core businesses are fairly cyclical. So if the weakness continues with the global economy, it will get tougher to remain profitable. It will also likely extend the timeline for the turnaround.
Bottom Line On General Electric Stock
Again, Culp has done a fine job so far and he has the right strategy in place. But getting General Electric stock on track is not about short-term fixes.
Something else: General Electric stock is at a fair valuation, anyway. Consider that the forward price-to-earnings ratio is 14x. In other words, for now, there’s no need to rush on this one.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.