2019 was bumpy for General Electric (NYSE:GE) stock, but it ended on a high note for its shareholders. The firm’s share price climbed almost 30% last year. Looking back over the past decade, though, tells a different story. General Electric fell off a cliff back in 2017 and still has a long way to go before returning to its former glory.
With the gains of 2019 under its belt, though, many investors are wondering if General Electric is finally making a comeback. Of course, that’s impossible to answer with certainty. But the shares look poised to rally again this year as long as GE’s CEO, Larry Culp, and his team stay the course.
Culp Is Making a Difference
One of the biggest reasons investors have been returning to General Electric is the changes Culp has made. His efforts to make General Electric more transparent are a big reason that sentiment towards the stock has been improving. He has vowed to be as open as possible with investors about the challenges faced by General Electric, a promise he’s made good on so far. Culp has disclosed more information in the company’s quarterly reports and set up an “insurance teach-in” to update investors on the progress of the company’s insurance business.
All in all, Culp looks like the right man for the job and investors seem to trust him. That trust doesn’t appear to be unfounded, either. Culp’s promise to be transparent is one thing, but his actions so far have backed up that sentiment. What’s more, data from natural language processing firm Amenity Analytics shows that Culp’s rhetoric on earnings calls has been less deceptive than that of his predecessors. He was also rated as less “deceptive” than the average S&P 500 CEO.
Culp’s Compensation Is Tied to GE’s Success
All of that is well and good, but I think the most important issue is Culp’s compensation package. Culp’s compensation is closely tied to General Electric’s share price. If he can increase GE’s share price by more than 50% by the third quarter of 2022, he will get a $47 million bonus. If he can increase the share price by 150%, that bonus will rise to a whopping $300 million.
If nothing else, shareholders can be certain that Culp is going to do everything in his power to increase GE’s value.
How GE’s Shares Can Rally
Raising General Electric’s share price is no small feat. The firm is battling against a host of headwinds, including a struggling power business, hefty debt, and a worrying cash-burn rate as GE Capital continues to be a drag on its overall business.
While Culp’s dedication to reworking the culture of General Electric and implementing cost-cutting measures are a good place to start, it’s worth noting that some circumstances beyond Culp’s control could prevent a General Electric rally.
First of all, a sustainable rally by GE can’t take place without economic strength. While economic data has continually improved in the past year, 2020 is a different animal all together. Since this is an election year, we could see some big swings in important drivers like consumer confidence, business confidence and the stock market.
Another factor that could hurt General Electric’s turnaround efforts is Boeing’s (NYSE:BA) ability to get its 737 MAX back in the skies. Boeing’s grounding of the MAX planes is reportedly costing General Electric roughly $400 million of free cash flow every quarter. It’s unclear how much longer Boeing’s MAX issues will persist, though some say that the FAA could start performing test flights on the plane at the end of January.
The Bottom Line on GE
General Electric certainly isn’t risk-free, but the stock looks like a good pick for long-term investors who are comfortable taking on some uncertainty. Culp’s proven success as a leader, coupled with his strong incentives to lift the stock, make General Electric a good bet. Plus, though General Electric’s success is tied to the economy, that’s the case for most industrials. The Boeing issue is certainly something to consider, but that problem could start to be resolved over the next month.
As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.
