The novel coronavirus has been a crushing blow for many industrial companies, including General Electric (NYSE:GE). Yes, the stock market has roared back to new all-time highs. And while the economy hasn’t made a “V” recovery like the stock market, some leading indicators are showing strength. So why is GE stock still in the dumps?
Simply put, major companies are afraid to invest in big infrastructure spending until they get a clearer picture of how a potential second wave of the virus plays out. Further to that, will the economic recovery will pick up momentum, or stall out? Thus companies like GE, which sell big-ticket items, are experiencing a drought as large parts of the economy remain paused.
Making matters worse, General Electric is heavily involved in the aerospace industry. It has taken two blows on that front. The virus has hurt the airline business, and the Boeing (NYSE:BA) safety issues have only made things worse. With all that in mind, it’d be easy to throw in the towel on an investment in General Electric. However, it’s not time to give up just yet. Here’s why.
GE Renews Its Contract With Culp
Recently, General Electric announced that is has extended its employment contract with chief executive officer (CEO) Larry Culp. Culp’s employment was previously set to run through 2022. Now he will be in charge until 2024, with the option of a further extension at that point.
In making this deal, GE gave Culp a huge bonus. The company will offer Culp an incentive award of more than 9 million shares of GE stock in return for his service. Even with shares down around $7, that’s still a fat chunk of money. And here’s where it gets fun — there’s a massive incentive structure built in. Depending on how the stock price goes, Culp’s performance award will be adjusted up or down. Long story short, if the General Electric stock price doubles in coming years, Culp will be in line to pull in a larger stock grant and potentially take home $200 million or more.
Now investors might complain that this is too much pay. However, remember that Culp was hired because he is a superstar executive. In Culp’s previous run at industrial conglomerate Danaher (NYSE:DHR), shares rose nearly 500% while Culp was in charge. He’s proven to be an astute capital allocator. General Electric brought him in to save the company, and this incentive structure clearly lines things up so that if Culp can pull his magic once again, he will be amply rewarded.
Timeline Keeps Slipping
As our Tezcan Gecgil recently pointed out, General Electric expects to return to generating positive cash flow in 2021. And yes, the company is still sticking to that plan even with the effects of the novel coronavirus. However, previously, 2020 was supposed to be the inflection point where GE recovered following the firm’s “reset” year in 2019.
At this point, investors are clearly getting fed up with waiting. And if a return to positive cash flow and profitability is pushed out into 2022, General Electric stock could continue to underwhelm for the foreseeable future.
Larry Culp and the rest of the management team have done an admirable job in terms of executing the spin-offs and asset sales necessary to create a smaller and leaner GE. The firm is now in a position to return to prosperity when the economy cooperates. But General Electric alone can’t get the economy back on track. Nor can it magically cause the Federal Aviation Administration to re-certify Boeing’s grounded jets as airworthy any faster.
There may be a reason the Board of Directors re-upped Culp’s contract now. The company’s big comeback has clearly been delayed for the time being. This new contract with Culp keeps the company’s leadership in place through this extended downturn. That, in turn, suggests good things for the long-term future, though not necessarily a big bounce in General Electric stock within 2020.
GE Stock Verdict
At least from my point of view, any investment in General Electric stock has been based on Larry Culp. Otherwise, there’s little reason to own GE as opposed to other American industrial companies with stronger balance sheets and business outlooks. The bull case for General Electric starts and ends with Culp being one of the industry’s best executives.
And it seems that General Electric’s board of directors agrees. Even despite the volatile moves in GE’s stock price over the past year, the board of directors went all-in on their CEO. With that in mind, I remain bullish on General Electric. Culp doesn’t have an easy job, as the first year of his tenure has shown. But the GE mess can still be fixed.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.
