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Can General Electric Stock Move Past Immelt and Welch’s Sins?

Dana Blankenhorn

Larry Culp has been CEO of General Electric (NYSE:GE) for a year now and has made impressive strides against one of its biggest problems: the huge debts incurred by predecessor Jeff Immelt.

Can General Electric Stock Move Past Immelt's Sins?

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Long-term debt was down to $90 billion in June, and Culp has set plans to reduce it by about $30 billion more. These plans include the sale of GE Healthcare’s biopharma unit to Danaher (NYSE:DHR) and a slow exit from Baker Hughes (NYSE:BHGE).

But some of the biggest overhangs from the Immelt era, like GE Power, remain. So does one from the era of Jack Welch — the reinsurance of long-term care policies highlighted by whistleblower Harry Markopolos.

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Where’s the Beef?

What’s worse is that the asset sales leave GE with few avenues to growth — and these growth avenues are why investors buy stocks.

GE reported a small loss of 1 cent per share for the June quarter. Its $28.8 billion of revenue was down over $1 billion from the previous June. Losing the biopharma unit and, eventually, taking Baker Hughes’ revenue off the balance sheet, will reduce revenue further.

Culp seems to be two-thirds of the way to a turnaround. He has stopped the bleeding and created a new, more transparent corporate culture. Growth is the next step.

In December 2018, GE filed to spinoff its most promising growth avenue, GE Healthcare, through a mid-2019 IPO. But Culp hasn’t talked about it in months. In February, Culp told CNBC that a 2019 IPO looks “unlikely.” Many investors are waiting for an update.

GE Healthcare accounts for one-sixth of the company’s sales and nearly half its profit during good times. It  seems to be the perfect platform on which Culp could work the magic he worked at Danaher. There he bought smaller healthcare companies, built their value and sold judiciously.

GE Aviation, the other big profit driver, faces a $400 million per quarter hit to cash flow from the Boeing 737-MAX scandal. But the unit continues to perform, generating military contracts even as foreign nationals get hauled into court for stealing GE’s trade secrets.

Analysts are Pounding the Table for GE Stock

Despite a lack of growth catalysts, analysts keep pounding the table for GE stock. A Citi analyst has a “buy” rating on the stock. Others have dismissed Markopolos’ charges, which I detailed in July, as overwrought.

The argument is that with less debt and business prospects improving, the company is trading at barely two-thirds its sales.

Any kind of profit would thus be a catalyst for the shares, initially as a defensive play but later, based on Culp’s acquisition wizardry. This is especially true if, as some analysts now believe, it has enough reserves to handle the long-term care losses.

The Bottom Line on General Electric Stock

It’s hard for me to buy the optimism yet, but there’s an argument to be made.

I think analysts still underestimate the damage Welch’s long-term care time bomb could do. Given the high cost of nursing care, and the average age of those insured, this will remain a problem for years to come.

But by the end of this year Culp may have cut GE’s debt nearly in half through asset sales. If GE Power really is on a “positive trajectory,” as one analyst recently claimed, it would take care of the last big downside risk.

The question then becomes how Culp can create growth. The June quarter showed GE with over $71 billion in cash and short-term investments on its books. Some of that is committed to the remains of GE Capital, which Immelt used as a cash cow to build his power and energy conglomerate.

But there may be enough there for Culp to shop for a healthcare acquisition. If he makes one, the stock will rise.

Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.

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