What's Next for GE?

10/15/2018 5:00 am EST

Focus: INDUSTRIALS

George Putnam

Editor, The Turnaround Letter

Shares of industrial conglomerate General Electric (GE) jumped on the announcement that previous Chairman/CEO John Flannery was removed by the board of directors, explains George Putnam, editor of The Turnaround Letter

New Chairman/CEO Lawrence Culp led industrial company Danaher through a highly successful transition from 2000 through 2014. Culp joined GE’s board this past April. GE also announced that it will not meet its cash flow and earnings guidance for 2018.

The abrupt yet unanimous decision appears to have been during a special board of directors meeting this weekend. The company’s press release implied that the board was disappointed with the pace of the turnaround under Flannery.

In addition to the CEO/chairman change, Thomas Horton, who led a highly successful turnaround of American Airlines after its 2011 bankruptcy, was named lead director.

Clearly GE is struggling with its turnaround, indicated by the reduced guidance and the write-off of essentially all of GE Power’s $23 billion in goodwill. The company did not provide new guidance, although it will likely provide considerably more information when it reports third quarter earnings, tentatively scheduled for October 25.

We think the change is a significant positive. While Flannery oversaw the first and much-needed steps in a difficult turnaround, his pace and execution, particularly at the operating level, was frustrating. His lack of experience from outside the GE world was a likely hindrance.

The new Chairman/CEO and the new lead director bring exactly this kind of perspective, discipline and operational capability to GE. We expect other senior executive changes in the upcoming months, likely including the chief financial officer.

The company’s cash flow and earnings issues could require an elimination of the dividend. Culp’s plans are unknown and the turnaround will likely be slow and prolonged.

However, GE’s assets are now in much better hands which should ultimately produce greater shareholder value and a higher stock price.We continue to rate shares of General Electric a buy. (Disclosure: An employee of the Publisher of The Turnaround Letter owns GE shares.)

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