After the legendary Jack Welch departed as CEO of GE (NYSE:GE) in 2001, the stock has mostly been a laggard. His successor, Jeff Immelt, did not have a good strategic vision for the company. As a result, GE stock went from $55 to a low $6 in the summer of 2020.
But lately, things have been in the bull mode. Now GE stock is at $13 and the market capitalization is $116 billion.
So is this a sign that the company is back on track? Or should investors be cautious?
Well, for the most part, I think the bull case looks pretty good right now. And let’s take a look at three reasons why:
GE CEO Larry Culp is a proven leader. When he led Danaher (NYSE:DHR) from 2000 to 2014, he built a high-performance conglomerate. During his tenure, the stock price saw an impressive 5X gain.
Now as for his stint at GE, Culp has certainly pulled off deep cost cutting and has unloaded various divisions. Yes, it’s the typical part of any turnaround playbook.
But Culp has actually gone beyond this. Keep in mind that he is an expert with lean management approaches, which have their roots that go back to Toyota’s (NYSE:TM) early days. The focus is about continuous improvement.
Culp also is known to frequently visit company divisions so as to advocate his approach. This allows for the lean principles to become part of the DNA of the company. Granted, this process takes time yet the benefit cans be significant, such as in terms of gains in productivity and quality.
Something else to note about Culp: When the novel coronavirus hit, he forfeited his salary and cash bonus. He instead took equity compensation. No doubt, it was a good move (the value is more than $100 million). But it is encouraging that Culp is highly incentivized by GE stock.
For decades, the finance business has been a major part of GE. But it has also been been problematic, in terms of the regulatory restrictions and debt.
To deal with this, Culp announced a major transaction with AerCap (NYSE:AER) that will reduce the liabilities from the finance division from $80 billion to $45 billion. Then over the next couple years, the goal will be to get the debt load to $30 billion.
This will not only mean less overall risk for the company – which is critical – but also allow for GE stock to be more of a pure-play on the non-finance businesses.
With the coronavirus fading away because of the vaccines from companies like Pfizer (NYSE:PFE), Moderna (NASDAQ:MRNA) and Johnson & Johnson (NYSE:JNJ), the prospects for GE’s industrial businesses look bright.
After all, it seems like a good bet that there will be a rebound of the aircraft engine business. The industry has considerable pricing power because there is only a handful of competitors like Raytheon Technologies’ (NYSE:RTX) Pratt & Whitney and Rolls-Royce.
Next, GE should get a boost from the policies of the Biden administration, which is focused on energy alternatives and infrastructure. The company has a substantial footprint in areas like turbines.
And finally, GE has a thriving healthcare business, which has leadership positions in MRIs, ultrasound systems and CT Scans. Then again, the company has been investing in new innovations, despite the cost cutting. According to Culp, in the latest earnings call: “Healthcare launched more than 40 new products including the mural virtual care solution which provides a complete view of patient status across a care area, hospital, or system. And we announced that we acquired Prismatic Sensors which has photon-counting technology, a huge leap forward in the quality of limit images that can be captured on a CT.”
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 founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.