General Electric: A Distinct Lack Of Vision

Summary

• General Electric seems to be completing a deal to sell off its aircraft leasing business to AerCap, for more than $30 billion.
• Apparently, getting rid of Gecas, as it called, was not originally planned by CEO Larry Culp when he took over, but subsequent events have contributed to a willing sell.
• More and more, it is apparent that Mr. Culp did not really have a vision for the future GE when he took over and has moved as opportunity has allowed.
• This lack of vision apparently impacted shareholder interest in the company, causing GE's stock to meander lower as his tenure progressed, only reversing this trend recently.

Many of us have been waiting for GE CEO Larry Culp to “pull the string” on some new deals so that we can get a clearer picture of what he has in store for General Electric Co. (NYSE:GE) and some greater idea of his vision for the future of the company.

Well, GE is making a deal that is adding one further piece aimed at solving the problem about what General Electric is going to look like in the future.

The word is out that General Electric is nearing a deal to sell its aircraft leasing business to the Irish Group AerCap for more than $30 billion.

Larry Culp took over the top position at GE in October 2018. I applauded the move on the part of General Electric, but I was not much taken by the early performance of Mr. Culp.

Apparently, investors were not that impressed with his approach to the turnaround and restructuring of the company for much of his tenure.

In the middle of October 2018, the month Mr. Culp took over the leadership of the company, General Electric’s stock traded around $11.85. The stock price reached a recent low in September 2020 as the stock closed at $6.20 on Sept. 24.

The stock price really didn’t begin to rise until the end of October. The rise flattened out in mid-December, but began to improve again in the middle of February, rising to its current level of just over $14.00 per share, currently on the basis of improving profits.

Looks like investors are seeing something that they finally like coming out of the company.

The General Electric Legacy

Mr. Culp inherited a mishmash of a company that was the extreme picture of what conglomerate American companies looked like. I won’t say any more on this now, but a conglomerate like General Electric, when Mr. Culp took over, was a meaningless legacy of a time when corporate leaders were buying companies in portfolio fashion with little to no rationale for the companies to be combined under one umbrella.

Mr. Culp’s job has been to turn General Electric into an organization that makes sense and that can perform at the highest levels.

This has been one of Mr. Culp’s problems up until this point, as he has not been able to effectively present a picture to the world of his vision of what General Electric could become. Consequently, he has been unable to articulate GE’s future and shareholders do not like that kind of situation.

As a result, GE stock fell during Mr. Culp’s first two years on the job. His rating: maybe a D-.

And, this was in spite of the stock market hitting all sorts of new historic highs.

At the end of January 2021, I was not impressed at all about GE's 2020 earnings report.

The reported earnings for the fourth quarter are given as the major reason for the recent rise in the price of the stock.

However, for me, there did not seem to be anything that that indicated that Mr. Culp was getting ahold of things. It was, as far as I was concerned, “same ‘ole, same ‘ole.” Things had not really changed much by that time.

Well, investors seem to think that maybe a page has been turned. The GE stock price is doing quite well, although, with Mr. Culp’s lack of transparency, I am still not a fan of his… nor of GE stock.

The New Deal

GE Capital Aviation Services, or Gecas, is the biggest remaining piece of GE Capital. And, with more than 1,600 aircraft owned or on order, Gecas is one of the world’s biggest jet-leasing companies, alongside AerCap (AER).

Mr. Culp originally did not seem to want to sell Gecas. However, with the onset of the COVID-19 pandemic and the collapse of the airline business, he seemingly has changed his mind and moved ahead to get further away from the airlines.

Overall, Mr. Culp has sought “to even out cash flows and refocus on core areas.” Operations he has parted with include the company’s biotech business, which was purchased by Danaher in a $21 billion deal that closed last year. GE also sold its iconic lightbulb business in a much smaller deal last year, and previously said it was unloading its majority stake in oil-field-services firm Baker Hughes Co. (BKR).

In addition, GE has cut overhead costs and jobs in its jet-engine unit while streamlining its power business. “The pandemic continues to pressure the jet-engine business, GE’s largest division, however,” per The Wall Street Journal.

Still, the company makes healthcare machines and power-generating equipment, and the rest of GE Capital extends loans to help customers purchase its machines and contains legacy insurance assets too.

So, there is not really much can say about the new deal, except it continues to show that Mr. Culp and General Electric are serious about downsizing the firm and creating a remaining entity that is somewhat manageable.

Final Thoughts

This latest move, however, seems to confirm the basic idea that Mr. Culp really had no explicit plan about what General Electric was going to look like in the future. Mr. Culp took over a menagerie of companies with one goal in mind: reduce the size and complexity of the overall conglomerate.

Mr. Culp, apparently did not feel that he could not present a vision of the future because he really didn’t know what was going to be left at the end of his shrinking of the company. Not a way to build up the confidence of investors.

One wonders, yet, whether or not he has any vision of what is going to be left of General Electric and what its future business model will be. Hopefully, he now has focused in on this.

In terms of investing in General Electric, I do not see a vision yet for the future, and I am not sure that Mr. Culp is yet able to prepare that vision. I am not willing to invest into such a situation, and, until such a vision and business model is presented, I cannot suggest that anyone else invest in such a situation. The future of General Electric is clouded in radical uncertainty and Mr. Culp has not made it any better.

Analyst’s 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.

Comments

[truckster]

John, man, wake up ! If you go back and really read GE's press releases and investor presentations since Culp became CEO, Culp has been very clear about what his strategy is both operationally and financially: simplify operations, focus on traditional strengths in manufacturing, improve the balance sheet, further isolate/contain the long tail Genworth risk, and more. It's going on right in front of your eyes! The sale of GECAS is a good move in line with Culp's strategy of operational and financial simplification: get out of a "non-strategic" business, use the freed up capital to further strengthen the balance sheet or invest in core businesses, and ergo, improve long-term return for shareholders. It is still not too late to buy GE shares and I would encourage you to at least take a small position here. Don't wait til the stock is $20 to finally see the light about what is going on this very positive turnaround story. And to top it off, Steve Tusa still has a neutral rating on the stock. When he finally wakes up and is forced to go to a buy rating, that will add further fuel to the upside. Yes, I am long GE.

[kimbillro]

@truckster , Are you implying that Culp is better than Two Jet Jeff and Welch were?

[Sighcopath]

@truckster
Actually I might go on a GE buying streak if GE ever goes on a buying spree rather than a fire sale spree. Good companies buy other companies to try and integrate the business model. GE sale of the airplane business, based on it being part of the financial arm, ignores the fact that GE has a major part of its business in manufacturing airplane engines. Would be an interesting exercise to find out the percentage of the jet engines involved in this sale had engines manufactured by GE. If GE is no longer going to be buying airplanes for the airplane leasing business will the airplane manufacturers be as inclined to install GE engines on new planes?

[wizwor]

@Sighcopath If you do not know that GE aircraft engines are the best in the world, then you probably ought not be investing in companies that build aircraft engines.

[DeZe100]

Your criticism of Larry Culp is so far off the mark. Larry Culp has no vision or plan? Are you kidding me? Have you paid any attention? I don't even know where to begin. So I won't. You comments are comparable to Joe Biden's BS that Trump had no Covid-19 plan.

[G. Blair Bauer]

@DeZe100 ,What IS Culp's vision or plan? I have not heard announce ANYTHING. I have seen him sell off many parts of GE. Nice if he would announce what his plan actually is.

[DeZe100]

@G. Blair Bauer Have you listened to his and GE's presentations? If you did, and didn't understand the plan, then you should be in another business. Plan is in progress and producing results.

[G. Blair Bauer]

@DeZe100 What i have heard is Culp say one thing and then SELL another asset.

[JAVAR]

Reverse splits are a means to raise cash at 8 times the SP... or at least 6.5 . No other reason. GE just screwed shareholders, again.

[DeZe100]

@JAVAR I am not in favor of the planned reverse split. I don't understand the benefit (there is none). I have never heard of a reverse split to raise cash. I have seen reverse splits when a company needs to raise its stock price to meet minimum exchange required price levels. So, explain to me how reverse splits are used to raise cash.

[Tomcat1947]

@DeZe100 I don’t know why it would raise cash either. I’d think it was to reduce the available shares and better control the stock price. Also it would reduce the possibility of hostile intervention at a time in which the company is restructuring. One less headache.

[Upbeat]

If you don't think he has a plan that is only because you don't know what his plan is even as he executes it.

[capt red beard]

@WisPokerGuy same thing here I think! I own the stock & sell the covered calls out of the money every month. Is that what you mean by rolling the calls?

[Old Wizard]

Reverse splits are not necessarily bad, it depends on what happens with the stock price and dividends subsequently. I have held three such securities. One ( nucor) has been very successful, one went bankrupt and the third, which I still own, has done better since the reverse split.
In GE’s case, one can easily understand that instead of using any or all of the cash from the GCAS sale( or whatever it is since GE retains a large number of shares in the new company) to buy back stock, h it can be used to strengthen the balance sheet or other reasons. Personally I really don’t think much of stock buy back strategies, a one time special dividend in my opinion would be more of a benefit if a company believes it has excess cash that can’t be used for growth or productivity increase. How the management actions benefit the stockholders remains to be seen. Perhaps the new orders for 737maxs , the vaccines and the gigantic government stimulus have convinced management that 2021 will be much better than was envisioned. Timing is everything. We shall see.

[Tack]

It's amazing to me that investors and commenters are treating this reverse split talk as if it were some indication of distress. It has utterly no commonality with the splits that distressed companies make to retain listings or keep prices above minimum purchase levels of some funds. This split is simply to return GE's total shares to a level consistent with other firms of similar valuation.

Lost in all this hysteria is that GE just reconfirmed their free cash flow forecast for the year and landed a huge new contract. This panicky dip has presented a veritable candy-store opportunity with options, as put premiums have zoomed higher and long-dated calls are on sale. The risk/reward equation appears very attractive for staking out contrarian long positions.

[diadochi]

@Tack That's the tack I'm taking. 😎 I bought the last two dips, thinking that really nothing's changed, and GE has been very strong in the last couple months, based on just the reopening of the economy, and the reflation of aviation. Go look at Boeing stock if you have any doubts about that.

[tyoungt1]

Are they purposefully trying to crater their stock? It kinda looks like it.

[SilverSpoon54]

What many are missing on the GECAS deal is that GE will retain 46% stock ownership. Instead of paying interest on 40B, they retire that cost impediment and have 25+B in stock that GE can unwind when needed. Brilliant strategy in my book. GE retains the maintenance on those engines in the fleet well into the future.

[MichaelW_R]

@SilverSpoon54 That is my sentiment but I do not believe the retail investor understands the benefit to both GE and AerCap. The entire focus seems to be on the reverse split - which technically speaking is a non-event - your equity remains the same and GE begins to look more like its industrial peers which is good.

[Always Bullish]

A careful analysis of the ongoing eight for one reverse stock split and the sale to Aercap makes sense. Larry Culp is an extraordinary CEO with decades of experience. If your already a shareholder and bought in when the stock was 6.00 plus you did well. Hold on, it won’t be long before the dividend is restored and the stock rises as the economy returns to normal. All value investors know when you buy a dollar for forty cents as Ben Graham taught you will do well.

[Clthokie]

@DLSheeler Right…cause everyone wants to buy a stock that is doing a reverse split. I mean reverse split stocks have such a great history of performance.

[ContrarianSurfer]

@Clthokie lol a reverse stock split for a company that is doing wel doesnt mean anything..

[Tack]

One can debate the divestitures and the logic of a reverse stock split, but, at one thing that is becoming very evident is that GE is implementing a strategy to return to "making things," not running a second-rate finance company, biotech concern or other esoteric endeavor, about which they have proven conclusively they know little. It was/is no easy job unwinding the bloated mess, but the direction would seem to be positive and consistent.

[locum2]

@Tack, the biotech company made things, along with the appliance company, lightbulb company, train company. These are all manufacturing companies that were sold.

[Tack]

@locum2 Lightbulbs and appliances became cutthroat commodity businesses, so they're not missed. Biotech is way out of their expertise realm. (Once, I worked for Pfizer, and they bought a CT company and lost billions because they had no idea about capital equipment. This is the reverse.). Trains might have fit their mold, but the market very limited in this country.

[dmau3]

Not really a turn around story. More of a structured liquidation. Still have lots of debt here.

[wizwor]

@dmau3 Stop it.

[SuperPac]

There are no good reasons for a long term investor to allocate investment cash to this decaying and incoherent corporate rubble.

[AndyG47]

Creative writing is an Art. Unfortunately, your article shows a lack of grasp of the fundamentals of the complex diverse business portfolio Mr.Culp inherited.
I personally give him tremendous credit for rational assessment and opportunistically moving forward to simplify the GE conglomerate Jack welsh put together and Jeffrey in melt ran into the ground.

Simply stated, the vision posited by Larry Culp publicly is returning GE into an industrial firm in a few high technology businesses and moving away from being an enormous financial entity.

Please do your homework on the numerous public statements issued by General Electric under Larry Culp.

Andrew Gori

[MichaelW_R]

Hi John. I respect your thoughts however I find it incredibly difficult to believe even for an instant that Larry Culp does not have a vision for what GE will look like. All of GE's decisions since he came on board to add clarity; focus on the right businesses; emphasize cash flow and efficiency - Larry had a pretty tough plate to deal with and I am not sure many could have done much better. Fact is GE is still a 'work in progress'. I would imagine with fewer shares outstanding stock buybacks are not an issue. perhaps a secondary offering in the not too distant future will serve to reduce debt even further AND more importantly for me allow GE to make acquisitions complementary to its current focus. I cannot help but feel that Larry Culp must feel the sooner GE can do this the better. GE's new CFO is about as good as it gets. Yes GE is still a work in progress and often like working with a new recipe you are not quite certain what the end game will look like what with the economy and politicians involved.

[Winnertakesall]

You mean your vision... Maybe you should get out and buy Tesla.

[del norte]

Blah blah blah blah blah

[Uriah Heep]

Maybe he's looking a little further into the future than you realize.

[cepjr]

Good to see you on the forums again Mr. Mason. I thought you had possibly suffered the consequences of our leaderships health care dismantling. But you still are able to see what you have always seen. To your good health!

Each time I read one of your articles on GE, I remember Mark 4:9. It seems like Matthew 13:13 is probably more apropos as I can SEE what Culp & GE are doing, I can SEE their vision in action. And I have SEEN all the earmarks of a successful turn-around in place. Of course, I don't hear anything more than you do, and probably hear less as I am not in the C-Suite circles.

This is still a time of faith and fate. If the economy doesn't recover soon, all the old industrial concerns will be reinventing themselves or losing market share. Oh -- and I mean that seriously whether they have "vision" or not.

[dgiinvestor]

@cepjr I gave you a "like," but I think you and Mr. Mason agree with each other more than you think.

If you think Culp is speaking in parables, that really isn't an appropriate communication model for corporate transparency.

[William- Billy Hill]

I am buying more GE today given 5% dip. Culp is a leader. He knows what he needs to do and is no afraid to get it done. The future for GE is bright . Reducing debt by $30B retaining, saving close to $1B in interest expense annually and retaining a 46% interest in a non core business is very smart. Go Culp, long GE.