Suddenly, General Electric (NYSE:GE) has gone on a winning streak. Since late September, GE stock has jumped from $6.17 to $11 (the price had hit the lowest levels not seen since the early 1990s). About $47 billion has been added to the market capitalization.
Now the shares are still off about 16% over the past 12 months. And yes, GE stock is well off its high of $30.57 for the past five years.
Of course, there are many reasons for long-term fall in GE. From 2000 to 2017, CEO Jeffrey Immelt proved to be a CEO who lacked strategic capabilities and disciplined management. First of all, he made several terrible acquisitions that lost substantial amounts shareholder value.
Next, GE’s capital business came under much pressure during the financial crisis – almost taking down the company. But even when the economy improved, GE did not. Eventually, the company would slash its dividend and the shares would be delisted from the venerable Dow Jones Industrial Average. Note that management even engaged in some accounting shenanigans (recently GE agreed to a settlement for this with Securities and Exchange Commission for $200 million).
Quite a lot, right? Absolutely.
Then what now? Is the rally in GE stock a clear indication that things are getting back on track? Or should investors remain cautious? Well, I actually think there is a bull case for the company.
Let’s see why.
Leadership
After Immelt departed, John Flannery became CEO. He had previously led the healthcare segment. While he made some good decisions – such as with the dividend – he was not moving fast enough.
So he was replaced by Larry Culp in October 2018. He certainly had the right background to take on the huge challenge. He had been the CEO Danaher (NYSE:DHR) — a complex conglomerate — and during his tenure from 2000 to 2014, the stock value spiked by five-fold.
Culp implemented rigorous systems to improve productivity and quality. It was part of the lean methodologies pioneered by Toyota (NYSE:TM). But Culp was also hands-on and would get into the minute details of the various businesses of Danaher.
Such an approach usually takes quite a bit of time. But the results can be powerful. In fact, it appears that Culp’s management processes are starting to make a difference at GE as well.
Yet Culp has taken other traditional restructuring strategies. He has aggressively sold off assets to streamline the operations and raised much-needed cash. He has also instituted steep cost cuts and has been reducing down the debt load.
The latest earnings report shows the impact of Culp’s moves. Both the revenues and earnings beat expectations. And the progress is likely to continue. Culp noted that industrial free cash flow will be at least $2.5 billion in the fourth quarter and positive for next year.
True, there is still much to be done. Keep in mind that the aerospace business is likely to lag for some time. But then again, Culp has been reducing the cost structure significantly for the division.
But the other businesses for GE are looking good. They include healthcare, power and renewable energy. For example, in the renewable energy space, the company announced two major turbine deals in the latest quarter.
Although, the healthcare business is likely to remain the star. Note that Culp made his first acquisition in this space recently. It was for Prismatic Sensors, which develops photon-counting detectors that improve the capabilities of CT scanners.
Bottom Line on GE Stock
Even with the recent run-up in the shares, GE stock is not necessarily expensive. The price-to-sales ratio is roughly 1.16X. Granted, there could be a some profit-taking. But then again, this could present an opportunity to get a better entry, especially as it looks like the GE turnaround is real and durable.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.
