The “smart money” has been wrong on General Electric (NYSE:GE) so often for so long that many investors wouldn’t touch the shares of the industrial conglomerate, regardless of its price. I share their skepticism.
Remember, Barron’s named former CEO Jeffrey Immelt as one of the World’s Best CEOs three times, which GE crows about in Immelt’s official biography of the company. Wall Street cut Immelt a lot of slack at the start of his tenure, which began four days before the Sept. 11 attacks in 2001. The pro-Immelt feelings, though, didn’t last.
Immelt bought and sold $100 billion worth of businesses. Some of the deals, such as the company’s 2015 $10.6 billion acquisition of France’s Alstom, were disasters that haunt GE to this day. General Electric stock fell nearly 30% under Immelt’s 16-year tenure, underperforming the S&P 500, which rose about 124% during that same time.
GE veteran John Flannery replaced Immelt when he “retired” in 2017. At the time of Flannery’s appointment, William Blair Analyst Nicholas Heymann described him to the Washington Post as a “pragmatic, well-respected guy.”
Can Larry Culp Succeed Where His Two Predecessors Failed?
A year later, Flannery was ousted as investors grew impatient with the slow pace of his turnaround. Under Flannery’s watch, GE slashed its dividend to a penny and set aside $15 billion for legacy insurance issues. GE’s stock price also continued to languish.
The company went in a different direction with Culp, the former CEO of Danaher (NYSE:DHR). Culp is the first outsider to lead Boston-based GE. His 14-year record at Danaher also was undoubtedly admirable. Both DHR’s market capitalization and total shareholder return skyrocketed by more than 450%.
I am not quite ready to pull the trigger on GE stock because the jury is still out about whether Culp will be able to replicate his success at DHR at GE. My commentary isn’t meant to impugn Culp’s management abilities as much as it is about the mess his predecessors have left for him to clean up. As far as I know, Culp doesn’t have a magic wand.
Wall Street analysts also largely remain skeptical. Their average 52-week price target is $10.85, 7% below the $11.73 level where it recently traded. UBS Analyst Markus Mittermaier is an outlier with a $14 price forecast. He told clients in a November note that his competitors haven’t done the homework needed to understand a company as complex as GE.
According to Mittermaier’s “deep dive,” GE’s earnings will grow by 12% and 29% in 2020 and 2021. Improvements in GE’s aviation and health care business will cause industrial free cash flow to triple to $2.3 billion. He rates GE as a “buy.”
Owners of GE stock have gotten some good news in recent months. GE shares surged 11% after its latest earnings report. The reason cited by The Wall Street Journal was as follows: “Investors and analysts were relieved the company’s core operations were apparently stabilizing, and there were no major surprises from a review of a legacy insurance business.”
GE Stock: Talk About Grading On A Curve
Shares of General Electric have surged 30% over the past three months, outperforming the S&P 500 Index, which surged 11% during that same time. All the good news is reflected in the current price for GE shares. When GE reports earnings later this month, investors will be looking for any signs that indicate that Culp’s turnaround is starting to work.
Wall Street analysts are forecasting a revenue drop in both the December quarter and the current quarter of more than 20%. Unless the company has a “blowout quarter,’ the shares will be range-bound for the foreseeable future.
As of this writing, Jonathan Berr doesn’t own shares of any of the aforementioned stocks.