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A Big Leadership Change Gives GE Investors Reason for Optimism

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General Electric (GE - Free Report) announced Monday that it would replace CEO John Flannery – who served in the position for just over a year – with company outsider Lawrence Culp, who has served on the GE board since April.

Investors cheered the decision with GE shares rallying better than 14% at the opening of trade, before paring those gains somewhat to close at $12.09/share, up 7% on the day.

GE had shed more than 50% of its market capitalization since Flannery took the reins in August of 2017.

The board was reportedly frustrated with a lack of results related to Flannery’s turnaround plan for the company which had intended to reduce the size of the company’s footprint in several poorly-performing businesses and to concentrate on three key areas – aviation engines, power generation and wind turbines.

GE was the last remaining member of the original Dow Jones Industrial Average, having been included in the blue-chip index since 1896 before being replaced in June after having lost more than 3 quarters of its market capitalization since 2004 - when it was briefly the most valuable U.S. company with a market cap north of $400B.

Founded in 1889 - with the help of what would soon become J.P Morgan & Co. - GE began as a consolidation of Thomas Edison’s interests in several electricity-related companies, but over the next century built or acquired businesses in a wide range of industries including broadcast entertainment, computing, oil and gas exploration, health care and a variety of banking and financial services through its GE Capital division.

While that level of diversification was lauded when nearly all the business units were working well, it has become a liability over the past few years. During Flannery’s tenure, the company saw a significant reduction in earnings, an investigation into dubious lending practices in its finance division, a significant cut in the dividend and, most recently announced it would take an approximately $23B charge in its power generation division because of material defects in turbines it manufactured.

Incoming GE CEO Culp served was the chief of industrial science and technology conglomerate Danaher from 2000 to 2014, a period during which Danaher’s market cap grew more than fivefold. He was widely credited with making shrewd strategic acquisitions, which is in some ways the opposite of his role at GE, which is seeking to divest and focus on its core strengths.

Even if he succeeds, it still may be a rough quarter or two for Culp as he makes difficult decisions about how to clean up the messes left behind by more than a decade of underperformance in many divisions. Though estimates for 2018 and 2019 remain largely unchanged over the past 60 days and GE is a Zacks rank #4 (Sell), share action today suggests that investors feel positive about Culp’s chances of turning things around at this once-mighty industrial giant.

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