General Electric (GE - Free Report) , a once industrial behemoth turned sour, is making a comeback with new CEO Larry Culp at the helm. GE lost roughly 75% of its market value from the first day of 2017 to the last in 2018. So far in 2019, the stock has surged over 27% and analysts are becoming increasingly optimistic about the stock. Sell-side analysts have been raising estimates for GE over the past 60 days propelling this stock into a Zacks Rank #1 (Strong Buy).
GE has been experiencing systemic issues in their business since the financial crisis with GE Capital being the key catalyst. GE capital created an enormous amount of liability for the firm during the financial crisis, with its leveraged business model. GE stock fell over 75% in 2008 to the level we see today, though it quickly recovered. The firm started rolling off its GE Capital balance sheet in 2015 to focus on core industrial competencies, which they should have done five years earlier. This delay has weighed heavy on the firm’s financials and stock, as investors see GE Capital as a substantial liability.
GE has been restructuring its business over the past few years and this has brought to light a lot of fundamental issues within the firm. General Electric made a few poorly timed acquisitions that have afflicted the stock over the past few years.
GE wrote down over $22 billion in goodwill impairment in 2018 primarily due to its overpriced acquisition of the French energy company, Alstom, which was made in 2015. Alstom boosted GE’s revenue but significantly pulled down margins because of a lack of profitability. This was a result of poor management decisions.
GE acquired a majority stake in the gas & oil company, Baker Hughes, in 2017. Unfortunately, the two firms were unable to find the proper synergies with each other and this has further shrunk margin for GE. Over the past year, GE has been slowly selling down its stake in Baker Hughes.
All of these issues I mentioned above have been priced into the stock and more, exemplified in the massive price decline. I believe that the worst of GE’s pain is behind us and that if management is able to make sound strategic decisions moving forward, their reign as industrial champs is not over.
The Comeback Story
GE’s comeback story hinges on Larry Culp’s ability to turn operations around. Culp has not been slacking since he took the helm in October of 2018. Already he has engaged in over 10 deals. The most significant deal being with Culp’s previous firm, Danaher. GE made a deal to sell off its highly volatile BioPharma business to Danaher for over $21 billion.
Culp is leaning up operations within GE so that it can focus on its core competencies.
Not all of GE’s segments have been weighing on its profitability. Their aviation group, which focuses on manufacturing plane engines, has been this firms “knight in shining armor”, growing GE’s top and bottom line for years and now makes up 60% of the firms operational profits. This segment is expected to continue being the principal growth driver for the firm, with 12% year-over-year top-line growth just this past quarter.
GE’s Healthcare division is the only other division in GE’s portfolio that is showing positive growth over the past 3 years. This segment was initially intended to be spun-off in the restructuring and they even filed for an IPO at the end of 2018. Larry Culp is now rethinking this decision to get rid of a profitable division.
The least profitable segment under GE’s operations is power, which has seen substantial declines in revenue and earnings. I believe a lot of this decline is due to Alstom’s burden, which has now been written down.
The Environmental Protection Agency just modified the Obama-era Affordable Clean Energy bill in an attempt to revive the coal-power industry. This new bill will allow older power plants to operate as they did before the Obama administration’s bill. This should boost profits from GE’s power segment that has a significant stake in coal-powered plants.
The issues with GE have been more than priced into its stock and I believe with Larry Culp’s guidance, this firm can come out of the furnace blazing upward. The firm has the connections to maintain the proper level of investment to keep growth on the table.
GE’s restructuring is not over, which could cause more stock price volatility in the short term but I am confident that after this restructuring is through this once industrial powerhouse will shine once again.
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