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General Electric: A Sign Of Hope

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About: General Electric Company (GE)
by: John M. Mason
John M. Mason
Banks, long-term horizon
Summary

General Electric's stock price bounced up at the end of the past week due to some positive news: cash flow projections for this year and into next year have increased.

Larry Culp, GE CEO, set out to restructure GE's balance sheet and there is indication of some success here accompanied by rising amounts of cash flow.

Mr. Culp has not presented a real vision of what he sees the new GE becoming and so these short-term successes will have to be sufficient satisfaction for the shareholders.

General Electric Co. (NYSE:GE) lost $9.5 billion in the third quarter, but the stock market responded positively to the news.

GE's stock, which closed at a little over $9.00 on Tuesday, jumped to $10.11 at the close of business on Wednesday and got to $10.38 by the end of Friday.

The loss included substantial adjustments for accounting charges.

What really excited investors was the jump in the cash-flow outlook for the year.

GE reported its adjusted cash flow from operations of $650 million for the third quarter. For the full year, management believes that the company will generate up to $2.0 billion.

The full-year projection includes the assumption that fourth-quarter cash flow will jump to at least $1.6 billion.

Why is this looked on so positively?

Thomas Gryta writes in the Wall Street Journal, that to GE the cash flow situation in the company is particularly important because of the struggles that General Electric has gone through over the past five or six years.

So much is happening to the GE balance sheet and to the GE income statement that cash flow takes on a more important position in the firm’s analysts because it does not bounce around due to accounting charges and adjustments.

And, as Spencer Jakab writes, also in the Wall Street Journal, balance sheet repair takes a long time to rebuild, much as a reputation takes a long time to repair.

The thing is that when Larry Culp, the new GE CEO, came on board, his basic statements about what he intended to do was to fundamentally rebuild the company’s balance sheet. In particular, he wanted to reduce the debt of the company, built up over years of costly acquisitions and generous shareholder payouts.

This, I think, is where I had my initial difficulty with Mr. Culp. I was used to a turnaround specialist coming into a company and, early on, provide to the investment community his or her vision of what the future company was going to look like.

Mr. Culp did not do that to my satisfaction and that is why I have not been as enthusiastic about what he was doing as some others have been.

I believe that this is one reason why the investment community has not been a big fan of the Culp tenure, the reason that he did not provide investors with some kind of a view as to what the Culp General Electric was going to look like.

In early October 2018 when Mr. Culp took over as Chairman and CEO of GE, the General Electric stock was trading around $13 a share. As noted above, the GE stock closed at a little over $9 per share on Tuesday, October 29, a little more than one year after Mr. Culp ascended to the head of the company.

During this time, the S&P 500 index rose by about 5.5 percent and hit numerous new highs along the way.

Obviously, Mr. Culp was not exciting his audience.

As Mr. Jakab states in his piece, “the recovery has been bumpy.”

But, as Mr. Jakab also contends, the repair of the balance sheet has advanced and GE, now, is perhaps at the point where a stock market break, a recession, or some other external disruption or crisis in confidence “almost certainly won’t create an existential crisis for GE.”

And, the investment community seems to be accepting this analysis.

The improvement in the cash-flow position of General Electric seems to be energizing some investors and GE’s stock price seems to be responding accordingly.

As mentioned above, General Electric is expecting to see its free cash flow continue to increase this year and will further the improvement in 2020.

“That is a drop in the bucket compared with the $9 billion in cash from disposals so far this year and the additional $29 billion or so of asset sales that are pending through next year, but it is a step in the right direction,” argues Mr. Jakab.

But, it is a movement in the right direction. It is an improvement, even though one could say it is only a small step on the way back.

What is still missing is Mr. Culp’s vision of the future General Electric. He still has not clarified in our minds exactly what he thinks General Electric can become.

And, I believe that Mr. Culp will not get any kind of enthusiastic embrace for his efforts until he can put some sort of a vision out for all in the investment community to see.

Right now, restructuring the balance sheet and increasing cash flows are fine, but that really does not tell us what we can invest in. It is really not providing something that we can get excited about and commit to.

I believe that GE stock will continue to linger around its recent range until something else happens… or until Mr. Culp actually articulates what the future of General Electric is going to look like. All that has been proposed so far smacks just of financial engineering.

Otherwise, the behavior of GE’s stock price will emulate the performance of the past year.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.