General Electric and the Perils of Larry, Episode 3: The Aircraft Disaster

A decade ago, General Electric (NYSE:GE) was a pillar of American business. Its financial operations were systemically important. Its ambition was to make American industry great again. GE stock was a mainstay in most portfolios.

General Electric's Massive Debt Burden Will Weigh Down on GE Stock

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Since then, the enormous missteps of former CEO Jeff Immelt have turned GE into “the perils of Larry” as current CEO Larry Culp is fighting to keep what’s left of the company alive.

Every time he seems to make progress, raising cash or putting GE Power losses behind him, something else goes wrong. Now it’s GE Aviation, once a crown jewel. The jet engine maker is laying off 25% of its workers over the novel coronavirus pandemic.

Worse, the health crisis is turning GE Capital into a disaster. Its biggest unit is GE Capital Aviation Services (GECAS), which leases airplanes.

Can Culp pull GE out of its spin? Stay tuned.

How Culp Got Here

When Culp left the Harvard Business School, where he was enjoying life as a professor after leading Danaher (NYSE:DHR) to glory, the odds were against him.

I had given up on the stock long before. I began following the story as a fan.

Culp’s immediate predecessor, John Flannery, had planned to sell GE Healthcare. Culp sold just part of it, to his old employers at Danaher. By December, Culp had a new plan in place. Big business names were singing his praises. Culp had made hard decisions to freeze pensions and had remade his executive team. The company had been de-leveraged, but it had hope. I took to posting pictures of GE jet engines on my stories.

In the movie business, we call that foreshadowing.

New Threats

Since I last wrote about GE, the shares are down nearly 40%. They are due to open this morning at $6.21 each. That’s a market cap of $54.3 billion, less than half the revenue it had under Immelt.

GE managed a first quarter profit of $6.14 billion, or 72 cents per share, on revenue of $20.5 billion. Nearly 30% of revenue hit the net income line. That’s a margin comparable to Alphabet (NASDAQ:GOOGL).

But Culp wasn’t celebrating. Neither were shareholders. COVID-19 meant a collapse in aviation orders.

“We are targeting more than $2 billion in operational cost out and $3 billion of cash preservation to mitigate the financial impact,” Culp wrote. Analysts now expect a loss of over $1 billion, 12 cents per share, for the quarter ending in June. Revenue is expected to be $18.31 billion, $2 billion below the March quarter.

The GECAS news caused its bonds to be downgraded, to B ratings across the board. GE Capital Aviation Services booked just $3.9 billion in lease receivables in April. In January that number was $6.4 billion.

GECAS is one of the biggest players in an aircraft leasing market worth almost $300 billion. Some international airlines are already going bankrupt, breaking contracts. Rates on both current and future leases are declining. Even young planes may be scrapped. GECAS had to cancel an option order on 69 planes. That can’t help GE Aviation.

Bottom Line on GE Stock

Bargain hunters are currently flocking into GE stock. It’s the second most-popular stock among young investors at Robinhood.

The most popular is Ford Motor (NYSE:F).

New investors are betting that the COVID-19 damage is temporary. They’re betting Larry Culp can contain and mitigate the damage. They know that GE shares rose over 50% last year and know that such a gain now would not even get it to $10 ashare.

I admire their faith. If I still had a multi-decade investment horizon I might be tempted. But I’m 65. All I can do is root for them, and for Culp, from the sidelines, and hope that some other part of the business doesn’t blow up.

Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology, available on the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story. 

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