- GE has a new boss.
- This is the best news I have heard in the past year or so.
- As I said last week, those who invested in the low teens could enjoy a great run.
- But opening 1/2 position right now could be worth the risk.
- My FV estimates have been adjusted to reflect latest developments, up to $13.6 a share.
Mark 1 October 2018 on your calendar: The new General Electric (NYSE:GE) is born.
BOSTON - October 1, 2018 - GE announced today that H. Lawrence Culp, Jr. has been named Chairman and Chief Executive Officer of the Company by a unanimous vote of the GE Board of Directors, effective immediately. Additionally, the GE Board has appointed Thomas W. Horton as Lead Director. Mr. Culp and Mr. Horton have been members of the Board since April 2018. Mr. Culp will succeed John Flannery as Chairman and CEO."
What was an obvious corporate decision, to me at least, when John Flannery was appointed as chief executive in mid-2017, has come about one year later. But now it is the time to enjoy the upside rather than pointing to the very simple fact that an outsider should have been appointed one year earlier.
After sticking to a fair value estimate of $12.1-12.5 for about a year, I have finally adjusted my model to account for lower management risk, adding $1.1 to my estimates, which see GE's FV now hovering around $13.6.
If you plan to open half a position today, there would be risk involved, but I wouldn't blame you.
Make no mistake: GE's fundamentals remain the same, of course, even though before the stock markets opened on Monday its shares rocketed up to 15% to ~ $13.1, which is a rather generous valuation given its fundamentals.
Yet this is a completely different ballgame now.
Firstly, a dividend cut and a rights issue could be in the cards, both of which would make a lot of sense to shore up a shaky credit rating. Its long-term bonds now trade below 90, which testifies to the risks involved.
Secondly, there could be more news on the road to its final restructuring, which I am assured is on track but could take a different twist, to give investors other reasons to be cheerful about its prospects.
After all, the healthcare (GEH) spin-off guarantees a floor valuation of about $60bn, including net debt, and then GE Aviation (GEA) could easy command a fair value of over $100bn. Then there is a large Baker Hughes (BHGE) stake to monetize as well as power and renewable energy units which are not exactly on a roll, but whose troubles could be now fully exposed, given latest news.
The question is how Mr. Culp - an outstanding executive who has the backing of the sell-side - will crystallize the value of GEA. As far as managing expectations is concerned, there could be no better leader for the board and shareholders alike.
Apart from these considerations, some of my banking sources have also suggested that Saudi Arabia could come to the rescue for some of its power assets, now that the IPO of Saudi Aramco has been shelved, while also supporting any dilutive cash call if GE goes down that route.
Topping up the balance sheet with $15bn of fresh equity would do no harm, my numbers show.
"Saudi Arabia needs a vehicle and GE is a perfect fit," one of my banking contacts recently argued.
Mr. Culp led Danaher from 2000 to 2014. He is a very smart guy who is "cool and slick as ice, while also friendly, funny, and approachable," one analyst who covered Danaher in those years told me. Another added "if there was a man who can turn this company around, that man is Larry. He knows well the rules of engagement."
This is precisely what GE shareholders need.
Good luck, Larry.
This article was written by
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