Larry Culp has worked wonders at General Electric (NYSE:GE) but the honeymoon for GE stock is finally over.
Culp’s pay packet was rejected by shareholders this month after directors extended him to 2024 and based his stock awards on lower targets. The headline number was $230 million, which would mostly be in stock, assuming all targets are met.
Analysts’ honeymoon with Culp’s GE is also over. At Tipranks, only 8 of 13 analysts now rate it as a buy. Their one-year price target of $13.92 is less than 5% ahead of where it opened on May 10.
GE stock is up only 22% on Culp’s watch, which began in October 2018, half the gain of the average S&P stock. But under the hood the news is better. Might GE be worth buying now?
GE Stock: Dealing with Debt
Culp joined GE from Harvard Business School, facing an absolute mountain of debt. I wondered at the time whether the company could even be saved.
It has been. The debt was down to $70 billion in March. Cash on hand at that date was over $38 billion. The company isn’t entirely out of the woods. S&P Global (NASDAQ:SPGI) expects to downgrade its debt again, to BBB, in the next year. That’s because remaining GE Capital assets are due to be put directly on the balance sheet, increasing debt leverage.
But Culp has brought good things to life at GE. He sold the fast-growth section of GE Health to his former employer, Danaher (NYSE:DHR). He has reduced its holding in Baker Hughes (NYSE:BKR), the oil fields tool company, to just 25%. That stake’s value has been rising as oil demand rises with the end of the pandemic.
GE is finally buying small health care bolt-ons. That’s a sea change. Culp’s predecessor, Jeff Immelt, had gutted the company, trading in GE Capital for energy and power, covering up the damage with accounting. Those days are over. You can trust GE’s numbers again.
The Bears Abide
But those numbers aren’t impressive. Net income and free cash flow beat estimates during the first quarter, but revenue was below estimates, 22% below a year ago.
Falling estimates on the future aren’t enough for the bears, who don’t like paying over 1.5 times sales for a shrinking pie. Years of buying Immelt’s happy talk now weigh on the stock. Culp has saved the company, but the goodwill is gone.
Long-term bear Stephen Tusa of JPMorgan (NYSE:JPM) is still bearish. He says the Administration’s plans to increase wind energy production won’t be enough for growth, since GE is still in the oil and gas business.
Our Larry Ramer disagrees. He see big tail winds for GE Power and its grid solutions business. TV analyst Jim Cramer sees big gains for GE Aviation as the world starts flying again. GE will also benefit from a move away from casting parts toward 3D printing, which cuts costs.
GE Stock: The Bottom Line
I think Culp can get a lot more done at GE. This was what he did at Danaher, turning it into a medical equipment powerhouse before retiring to Harvard, from which GE recruited him. Culp is still just 58 and likely motivated to prove doubters wrong.
If Culp can replicate the December quarter’s performance of 28 cents per share in earnings, the stock’s current price is less than 12 times that. The short-term return of oil and gas demand, combined with renewed demand at GE Aviation, makes that achievable. Add a few more acquisitions in health care and this could be a growing company by the end of the year.
It’s worth speculating on. That’s the best thing I’ve had to say about GE in years.
At the time of publication, Dana Blankenhorn directly owned no shares, directly or indirectly, in any company mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at email@example.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.