I have written a lot about General Electric (NYSE:GE) lately, as this company is in the midst of major restructuring efforts that were first announced in November 2017. GE has changed course seven or eight times over the last two years (exaggerating, kind of) but the most recent change occurred when Mr. Larry Culp replaced Mr. John Flannery as CEO.
Mr. Culp has been on the job for only a few weeks now but he is already making himself available to the financial community. And more importantly, he is making structural decisions that will have a lastly impact on this once-great conglomerate.
Mr. Culp sat down with CNBC's Mr. David Faber to answer questions and discuss the current state of General Electric. Before going any further, the interview is a must-watch (or read) for shareholders and prospective investors. Here is a transcript of the interview.
Mr. Culp and Mr. Faber discussed many different topics but two [related] points really stuck with me - (1) the focus should be leverage not liquidity, and (2) management has a sense of urgency but they will not panic.
Focus On Leverage Not Liquidity
Mr. Faber asked about several concerns that were raised after GE reported Q3 2018 results and, more specifically, he asked if investors should be concerned about liquidity or leverage.
Mr. Culp's response:
I think that's an important distinction that you just made relative to liquidity verses leverage. Two weeks ago, folks were I think understandably asking the liquidity question. I think we've put that to rest given the fact we've got 20 billion of cash. We have a robust here too CP program and $40 billion of bank lines. We've only tapped two. But I think that gives us a foundation.
He went on to say:
And again, whether it's an equity analyst, whether it's the rating agencies -- witness the downgrades, or what we've said ourselves, we need to bring the leverage down. And I think we've got plenty of opportunities through asset sales to do that.
Mr. Culp is correct that leverage, not liquidity, should be the focus for investors. Moreover, as I recently described, I am not sure why liquidity as a major concern was even brought up by the bears. Leverage is a concern but, in my opinion, management has some levers to pull (and one was actually just pulled - more on this below).
Sense of Urgency But Not Panic
Mr. Faber asked if there was a sense of urgency for GE to sell assets.
Mr. Culp's response:
Very much a sense of urgency, David. But as John Wooden, the famous basketball coach said, "be quick but don't hurt." And I think that's the mindset that we have. When we look at healthcare for example, a tremendous franchise, we talked in June about an IPO there where we'd take 19.9% of the proceeds as cash. We have flexibility, we have options there. We could preserve our tax-free spin status while selling up to 49.9%. So there's a lot of cash there, given some of the estimates of value that are out there. We're tracking very well with the closure of our merger with [W]abTec, with our transportation business. We'll end up with just under 10% of that business in equity. Another option there. And Baker Hughes. A lot of people have talked about Baker Hughes. A $28 billion market cap company as of Friday's close. We own 62.5% of that company. So lots of options just in those three to generate real cash to bring that leverage down.
He obviously telegraphed the Baker Hughes, a GE Company (BHGE) sale but another important point that he made that is GE has a lot of optionality with its assets/holdings.
Additionally, I find it funny how many times JPMorgan's Stephen Tusa was referenced by Mr. Faber during the interview. It is almost to the point that whatever Mr. Tusa says "has to be true", which somewhat makes sense given the fact that he is been so right about GE over the last two plus years. I honestly do not believe that GE shares can move higher without Mr. Tusa saying something positive about the company, which is not a great place for Mr. Culp and team to operate from. I do not like to see a pundit have so much control over one of my investments but, in a round about type of way, I guess he earned it, right?
Anyhow, I believe that Mr. Culp was on point with his comments and that he appears to understand how GE is viewed by the Street ("the can't do right" company). Mr. Tusa will likely eventually jump on board once management is able to make a string of good decisions. And, in my opinion, the Baker Hughes, a GE Company transaction was a step in the right direction.
Analysts have rightfully called into question management's decision to sell a large stake in Baker Hughes, a GE Company for approximately $2.3B. Remember, BHGE shares are down big since the merger between the old Baker Hughes and GE's Oil & Gas segment was completed in mid-2017.
BHGE shares are down over 30%. While I agree with Bob Nardelli that the BHGE sale probably happened 15 months too late, let's also remember that Mr. Culp is only a few weeks into his tenure. So, yes, it is painful to see GE buy high and sell low (a common occurrence over the last 17 years), but, looking forward, I believe that it was the right decision to make.
After this sale, GE's ownership stake in Baker Hughes, a GE Company will shrink from 62.2% to slightly above 50%. In my mind, this decision signaled two things:  Mr. Culp does not care if he makes the prior management teams look bad, which is an area where Mr. Flannery struggled; and  Mr. Culp is trying to change the narrative sooner rather than later.
I do not believe that the BHGE sale absolutely had to occur now, especially when shares were already down big, but I understand why the decision was made. He has to show investors and other stakeholders that structural changes are no longer just talking points. It's never good to take a loss on an investment but I believe that a statement transaction, like this one, will have other long-term benefits. Also, GE still maintain over a 50% stake in BHGE so the company still has a lot of optionality in the quarters/years ahead.
This is pure speculation, but I believe that Mr. Culp will slowly transition GE into more of a holding company. With this, I could very easily see GE eventually holding majority (or large) stakes in Healthcare, Power (the "good" part of the business), Aviation (may retain 100% ownership), Renewables, Transportation (yes, this would mean that management would have to change their plans to distribute most of ownership position to shareholders) and BHGE. A Siemens-like (OTCPK:SIEGY) structure for GE, as Mr. Henry Miles recently described in this article, would be well-received by the market, in my opinion.
Headline risk is taking over and, more specifically, the market listens any time JPMorgan's Tusa talks about GE, and rightfully so. And more broadly, investor sentiment is the key driver of GE's stock and it will likely be for the foreseeable future, so I would pay close attention to what the Street has to say about the prospects for this storied company. Remember, analysts can be wrong (and they are a lot of times), but it seems like the market hangs onto any of the GE bear stories that get floated in today's environment.
Mr. Larry Culp talked a good game during the CNBC interview and he then followed through with the BHGE decision a few days later. When was the last time GE's management team told investors what they were going to do, and then followed through shortly afterwards? Crickets.
The BHGE sale was a good decision, in my mind, because it help change the narrative (yes, more still needs to be done). I believe that GE is a 3- to 5-year story so I will continue to hold onto my position, but, in my opinion, I would avoid putting new capital to work in this industrial conglomerate until more is known about (1) the SEC/DOJ investigations and (2) the adequacy of the long-term care reserves. GE's other businesses are performing well, but I believe that the risk level for this industrial conglomerate continues to tick higher so it is hard to get excited about the stock, even after the recent pullback.
Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.
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Disclosure: I am/we are long GE, BHGE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.