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The Easy Gains for General Electric Stock May Be Over

InvestorPlace logo InvestorPlace 2/11/2019 Tom Taulli

In the Harvard Business Review’s September-October issue, former General Electric (GE) CEO Jeffrey Immelt wrote a piece called “How I Remade GE.” He provided advice like the willingness to pivot, be all in, be disciplined and so on. He then concluded: “It will take years for GE to fully reap the benefits of the transformations. But as I contemplate my departure, I love where the company is positioned.”

Yes, this has turned out to be out-of-whack with reality! When he wrote this, General Electric stock was on its way to an epic plunge — hitting lows in December that had not been seen since the financial crisis. Along the way, there was a slashing of the dividend, large asset write offs and government investigations. Investors were even aggressively buying up derivatives that wagered on potential debt defaults at the company.

The situation seemed hopeless.

Yet the pessimism may have been too extreme. Since the start of the new year, General Electric stock has certainly pulled off an impressive rally, up about 30%. But this move is due more than just to technical factors.

General Electric Still Has Strengths

Let’s face it, GE still has many core advantages, such as an enormous global infrastructure and a powerful brand. The company also has extensive customer bases in businesses for commercial aircraft engines, turbines and healthcare equipment. In fact, the engine business is likely to remain a long-term growth driver as manufacturers like Boeing (BA) continue to see robust order pipelines.

But as for GE stock, perhaps the most important thing has been the hiring of Larry Culp as CEO in October. Even though he is only 55 years old, Culp has had a stellar career. From 2001 to 2014, he was at the helm of Danaher (DHR), where he posted standout results for shareholders. He demonstrated adept skills in generating strong cash flows and pulling off smart deals. No doubt, such expertise should be a big help for GE stock.

On the latest conference call, Culp set forth the key parts of his turnaround strategy, which involves wiping $50 billion in debt from the balance sheet. This will be done with a combination of cost efficiencies and the unloading of assets, such as the position in Baker Hughes (BHGE).

Culp also discussed his playbook for management (he even referred to Jim Collins’ legendary book, “Good To Great”). He noted that there will be much deeper analysis of the operations of each division, such as looking at materials purchasing, labor productivity, R&D and marketing He also said there will be fewer priorities; instead, the focus will be on higher strategic objectives. And most importantly, the main goal will be “on putting our customer at the center of all we do. Over the past few months, I’ve spent time with our customers in China, the Middle East, Europe and here in the U.S. I’ve learned that what they value is not always aligned with how we measure our own performance.”

Bottom Line On GE Stock

All in all, Culp has done a fine job.  I also think it’s a good bet he will not be wasting his time writing puff pieces for the Harvard Business Review.

Yet despite this, there needs to be some realism with General Electric stock. The turnaround is in the early stages and there will likely be some tough challenges. It definitely does not help that the global economy is starting to decelerate. In the meantime, the power business is still in a funk — and it could easily take a few years to get things back on track.  Then there are the issues of handling the federal investigations and the liabilities of the financial services business.

So for the most part then, there is probably no rush to buy GE stock right now, especially since there has already been a big move in a short period of time.

Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


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