General Electric (GE): 2019 Top Picks' Mid-Year Update

07/16/2019 5:00 am EST


George Putnam

Editor, The Turnaround Letter

George Putnam, editor of The Turnaround Letter, picked General Electric (GE) as his favorite investment idea for 2019. The stock has since risen 44%. Here's the latest update from the leading turnaround specialist.

GE shares have rebounded sharply this year, as investors’ overly dour view began to yield to the possibilities of a turnaround led by the impressive new CEO Lawrence Culp. We believe there is more upside as the company delivers on its plans.

We liked the stock at year-end, given the combination of a sharply out-of-favor price and a strong catalyst to reverse the downward trend. These traits are the hallmarks of our strategy and have worked well in the case of GE.

In late December, the market assumed a grim future for GE, pushing the shares below $7, down nearly 75% from their price only two years prior and approaching their lows of the 2009 global financial crisis.

Investors worried about GE’s heavy debt load, negative free cash flow and seemingly limited prospects for improving its situation, particularly if the economy went into a recession. We believed this outlook was an extrapolation of the past, leaving the shares poised for a rebound on any good news about the company’s future.

At year-end, we saw a lot of potential good news ahead, driven by GE’s new leadership. Our approach puts a lot of weight on catalysts for change and the value of new leadership — which new CEO Lawrence Culp brings.

Applying his fresh perspective and deep capabilities to GE’s myriad problems, by year-end the company had already begun to take rapid remedial actions to repair its balance sheet, reverse its negative free cash flow and position the company for a much more prosperous future.

At mid-year, GE shares still remain attractive. We believe the market continues to short-change the increasing likelihood of a much more prosperous GE. 

The company’s multi-year turnaround is only in the early stages. Culp’s focus on making fundamental changes to how the company runs its businesses, including pushing accountability out to its operating units, should produce a much more capital-efficient and profitable company.

Results from the first quarter and other updates provide indications of the profit margin and cash flow potential of a post-transition GE.

Culp’s guidance that 2020 Industrial free cash flow should be positive and significantly improved from 2019 is encouraging. His efforts to accelerate debt paydown is a smart and necessary move toward restoring GE’s long-term stability.

The announcement and pending closure (by 1Q20) of its deal to sell its BioPharma unit to Danaher for $21.4 billion is one of several potential confidence-boosters in this regard. The company has plenty of liquidity to meet its current obligations.

The turnaround may not be linear, in that quarterly results might not always show steady sequential progress. The Power business still struggles in a very challenging industry.

A global or regional recession could delay GE’s return to positive free cash flow and threaten its still-fragile financial condition. However, the scope and pace of the company’s fundamental overhaul is underappreciated and leaves considerable upside for patient investors.

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