Let’s be honest. In light of how poorly General Electric Company (NYSE:GE) has performed, and in light of how far the GE stock price has fallen since the middle of last year, it was only a matter of time before the company acquiesced to activist investor Nelson Peltz, of Trian Fund Management, and put one of his hand-picked people on the Board of Directors. Not even the “retirement” of three long-tenured executives was enough sate Peltz and his team, with the maneuver likely seen as too little, too late.
Source: Anthony Quintano via Flickr
The question most owners of General Electric stock are asking in the wake of the recent news: Now what? GE stock fell more than a bit in response to the news, suggesting investors aren’t thrilled with the disruption that’s sure to take shape from here.
If you’ve got the same concern, here’s what’s likely in the cards.
Change Was Coming, the Easy Way or the Hard Way
After a long and often-heated battle, Nelson Peltz finally got his way. Trian’s chief investment officer Ed Garden has officially replaced Robert Lane, who’d been on the board for twelve years.
It’s a start, though not likely a finish, for Peltz and Trian. Peltz has been increasingly frustrated at a stagnant GE stock price, adding that the company’s management hasn’t done the job they’ve been assigned. In late 2015 the activist investor’s fund penned a lengthy white paper suggested General Electric stock was simply undervalued by as much if not more than 50%, in the right scenario.
None of those scenarios came to pass though, at least not to the market’s or Trian’s satisfaction. By early this year Peltz was pointing the finger at then-CEO Jeff Immelt. By the middle of this year he’d been forced out, replaced by John Flannery.
Chief Financial Officer Jeffrey Bornstein is also out, along with vice chairs John Rice and Beth Comstock. Former CEO Jeff Immelt is also no longer the Chairman of the Board.
Analysts, like investors, aren’t quite sure if the shakeup is good news or bad news. JPMorgan Chase analyst Stephen Tusa commented, “The negative signs of significant house cleaning… opens the door to many outcomes that would have perhaps not been possible prior.” Tusa contends, however, that one of those possibilities is a reduction in the company’s increasingly difficult-to-pay dividend.
Citigroup’s Andrew Kaplowitz is also seeing both sides of the coin, commenting, “We choose to view GE’s sudden announcement of more significant announced leadership changes as ‘glass half full.’ We understand that GE bears could view this announcement as another signal that GE’s near-term results and/or medium-term recovery could be slower/choppier than expected, but these changes likely represent a necessary step toward a more accountable, streamlined GE.”
And, it’s Kaplowitz’s viewpoint that sets the stage for what may be in store for General Electric stock going forward.
Looking Ahead for GE Stock Price
The brutal truth is, just like the GE stock price, General Electric hasn’t been moving ahead. At best it’s been shrinking its way to better viability, shedding units and businesses rather than repositioning or rehabilitating them. It works, and there’s a certain upside of a tighter focus. Streamlining isn’t always necessarily the best idea to unlock shareholder value though.
Peltz didn’t think it had to be the most important move for General Electric either. He simply wanted the company to operate a tighter ship with the business lines it still owned as of late 2015. Trian wasn’t even initially calling for management changes. When nothing significant unfurled for the better though, Peltz and Trian turned up the heat.
The market, and Kaplowitz (and Tusa, for that matter), are right. This is going to be a disruptive change that could crimp a couple quarters worth of results. GE stock is likely to respond accordingly even more than it already has.
In a broader sense though, this is all going to lay the groundwork for a much-needed change from a company that’s struggled to find its place in the modern energy, industrial and aviation marketplaces. Once it’s past all the growing pains, the GE stock price can finally again begin a long overdue march forward.
That march hasn’t quite started yet though. It’ll take at least a few weeks for the dust to settle and for the market to start believing in the company’s new direction.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
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