Has General Electric (NYSE:GE) finally turned the corner? As Larry Culp celebrates his first anniversary as CEO, negative sentiment around the company seems to have lessened. However, the struggles continue and General Electric stock has lost about one-third of its value during his tenure.
Still, Mr. Culp has sold off many underperformers, including GE Biopharma, which the firm sold to Culp’s former company, Danaher (NYSE:DHR). Also, the company continues to work on its still massive debt load.
Moreover, the beleaguered GE Power division has seen its orders stabilize and interest build in its wind energy solutions. Though the company remains in the middle of a tenuous recovery, the speculative case for General Electric stock continues to show gradual improvement.
Larry Culp and GE’s Improvement
Larry Culp commemorated his one-year mark at GE by promising that the company will deliver “significantly better” results in 2020. This stands in contrast to the GE he took over a year ago. At the time, the company had just fired its CEO after a little more than one year on the job.
Looking back, many saw the decision to fire former CEO John Flannery as controversial at best. Yale management professor Jeffrey Sonnenfeld thought that GE’s board should have given Mr. Flannery more time.
“How long do you let somebody twist on the vine? But 13 months is a pretty short window, I’d have given it a year and a half at least,” said Sonnenfeld.
One can speculate whether sticking with Flannery would have helped General Electric stock. However, Culp appears to have ended the “constant drip” of bad news that wore down support for Mr. Flannery.
GE Stock and Crisis Management
Also, when bad news appears, Culp has worked to reveal the bad news as quickly as possible. As some might recall, GE immediately explained slowdowns at GE Aviation unit after Boeing (NYSE:BA) suspended deliveries on its troubled 737 MAX aircraft.
Still, perhaps no event showed Mr. Culp’s commitment to credibility more than his reaction to Bernie Madoff whistleblower Harry Markopolos. When Markopolos alleged accounting fraud at GE, Culp quickly dismissed the allegations as “market manipulation.” He also bought $2 million worth of GE stock at $7.93 per share.
The stock has slowly recovered since the Markopolos report. As a result, Mr. Culp now holds a 7% paper profit in his recent purchase of General Electric stock.
However, this report should remind everyone that GE remains a speculative buy. Given the turmoil GE faced during the financial crisis, accounting fraud remains a possibility. Still, I think the current GE stock price of about $8.50 prices in that possibility.
That price also indicates Culp is slowly winning the battle. While investors cannot be 100% certain that toxic assets remain on the books, Culp would have likely revealed such irregularities by now. Also, as David Moadel noted, the gefraud.com website continues to display a “403 Forbidden” error. While this can happen for many reasons, seeing the information from the website disappear so quickly does not lend credibility to Markopolos’s case.
Should I Buy General Electric Stock?
Such battles and victories bolster the speculative case for GE stock. When investors buy General Electric stock, they already know that GE is a $74.4 billion company holding $87.45 billion in debt as of the last quarter. Assuming investors can stomach that situation, they can buy this company at just 11.4 times forward earnings. Although Wall Street expects profits to fall by 4.6% this year, it also predicts the “significantly better” results in 2020 that Mr. Culp promised. Analysts forecast profit growth of 21% in the next fiscal year. On average, they also expect earnings increases of 10.07% per year over the next five years.
Still, James Brumley makes a good point that something needs to come next to foster a recovery in General Electric stock. Cleaning up a balance sheet is one thing, but turning on future generations to GE’s products will take more work. To bring about a stock recovery, the company will have to buy or create new growth engines at some point.
That will likely come later as GE’s recovery continues. For now, if Mr. Culp continues to bring down debt and improve the performance of GE’s existing divisions, he increases the likelihood of a comeback for General Electric stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.