When Larry Culp was named CEO of General Electric (NYSE:GE) in 2018, the venerable industrial conglomerate was a bloated mess and deeply in debt. GE stock had been dead money for years, thanks to the mismanagement of Culp’s predecessors John Flannery and Jeffrey Immelt.
It was Flannery who “surprised” the board and investors with a $15 billion charge for a legacy insurance business and a $23 billion charge related to its Power business, stemming GE’s ill-advised $10.6 billion deal in 2015 for Alstom’s power and grid business pushed by Immelt.
Interestingly, GE announced this week that it wouldn’t claw back Immelt’s pay after the conglomerate reached a $200 million settlement with the SEC for repeatedly misleading investors.
Culp, the first outsider to lead GE, quickly got to work after taking the helm of the 128-year-old firm. He cut GE’s dividend, started to unload the company’s stake in oilfield services giant Baker Hughes (NYSE:BKR), and divested the company’s BioPharma division for $21 billion. He’s also slashed the payroll by the thousands as the coronavirus pandemic cratered the world’s economy.
CEO’s Noteworthy Progress
Though it’s early to say that Culp has turned around GE, he has made some noteworthy progress. Between January 2019 and the third quarter of 2020, General Electric slashed its debt by $25 billion, with $17 billion trimmed in the first nine months of 2020. The company had $39 billion in cash on its balance sheet as of the most recent quarter.
Even long-term GE bears such as analyst John Inch of Gordon Haskett Research Advisors credit Culp with rescuing the venerable industrial conglomerate from financial ruin. Inch isn’t the type to lavish praise on an underserved CEO.
“He saved the company, but he got a helluva lot of help from the economy and the Federal Reserve,” Inch told CNN last year.
GE Stock Price Showing Signs Of Life
Shares of GE, which have plunged more than 60% over the past five years, have been on a tear of late, gaining nearly 80% since November. Some 17 Wall Street analysts have an median 52-week price target on GE stock of $12, about 6% below where the shares currently trade. The range of estimates is huge, with a high of $21 and a low of $7.
Even so, there are many reasons to be bullish on GE stock because of Culp, which is why I am recommending it.
Culp under-promises and over-delivers, just another trait that separates him from predecessors like Immelt. Wall Street was blindsided when he announced that GE would generate positive free cash flow in the third quarter in October. At the time, analysts expected that it would burn through at least $1 billion in cash. Boston-based GE is expected to generate at least $2.5 billion in cash during the fourth quarter.
Striking An Optimistic Tone
“As I reflect on just where we are here in the quarter, I think we came out of clearly the second quarter, the toughest quarter I think we’re going to see hopefully again in our careers, if not our lives,” Culp told a Morgan Stanley conference in October.
Indeed, Culp touted several GE businesses’ developments, such as a pick up in medical scanners and pharmaceutical diagnostics equipment sales. The company’s Aviation business, which got hammered by the pandemic, is rebounding as GE Power, another division that has weighed-down its financial performance.
Pay For Performance
GE’s board is pleased with Culp’s performance, extending his contract to 2024. It also cut the stock price targets GE must hit for him to receive a $230 million bonus.
“In approving the amendment to Mr. Culp’s employment agreement and this award, the board considered the best interests of shareholders and the goal of substantially extending Mr. Culp’s tenure with the company,” GE said in an SEC filing last year. “The board believes that the performance share grant will promote the alignment of Mr. Culp’s compensation and long-term shareholder value creation.”
On the date of publication, Jonathan Berr did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Jonathan Berr is an award-winning freelance journalist who has focused on business news since 1997. He’s luckier with his investments than his beloved yet underachieving Philadelphia sports teams.
Written by Jonathan Berr.
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