On Oct. 1, 2018, the General Electric (NYSE:GE) stock price closed at $11.62. In the 11-plus months since then, General Electric stock has struggled, falling by 25%.
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Why is Oct. 1 meaningful? It’s the day that Larry Culp, the celebrated former CEO of Danaher (NYSE:DHR), was named the new CEO of General Electric. Investors loved the move: the GE stock price closed 7% higher on the news. The hope was that Culp, who had presided over significant operating improvements at one industrial conglomerate, could work his magic at another.
That hope seemed to fade quickly. Amid a plunging broad market, General Electric stock kept falling. In December, it briefly dipped below its financial crisis low of $6.66, touching a 25-year low in the process. A better broad market sparked an early 2019 rally, but accusations of accounting fraud last month sent shares tumbling.
For all the volatility and news, the irony is that not all that much seems to have changed in the last 11 months — other than the GE stock price. Even the most bullish GE investor knew that Culp’s turnaround efforts were going to take years to pay off. I’ve long been a GE bear, but even I have to admit: investors buying the turnaround last year should be absolutely loving General Electric stock below $9.
A Busy Year for General Electric Stock
From one standpoint, GE stock looks very different now than it did last October. The company has aggressively sold assets to reduce its debt. Last month, GE Capital agreed to sell its aircraft leasing business for an estimated $4 billion to Apollo Global Management (NYSE:APO) and Athene Holding (NYSE:ATH). That follows a roughly $1 billion sale of energy investments to Apollo last year.
In February, GE merged its transportation unit with Wabtec (NYSE:WAB), picking up cash in the process. It amended its agreements with Baker Hughes, a GE Company (NYSE:BHGE), and raised a few billion more in an offering of BHGE shares. Most notably, it agreed to sell its GE BioPharma business to Danaher for $21 billion.
There have been concerns about the exposure of GE Aviation to the 737 MAX debacle at Boeing (NYSE:BA). As noted above, the company was accused of accounting fraud in GE Capital’s long-term healthcare business. GE Power showed signs of life in the second quarter.
Simply put, there has been a ton of news when it comes to General Electric stock. And yet, from another perspective, not all that much has changed.
Has the Story Changed?
As far as the asset sales and spin-offs go, it’s not entirely clear that they created — or destroyed — all that much value for GE stock. General Electric obviously is giving up profit streams in exchange for near-term cash. That improves the balance sheet — a key reason why General Electric bonds have outperformed General Electric stock – but doesn’t necessarily change the total value of General Electric’s business.
Even the big sale to Danaher, which seemed like a logical step, wound up ending hopes for a spinoff of GE Healthcare. GE sold its Baker Hughes shares at $23; BHGE closed Friday at $23.53. The Alstom acquisition remains a weight around the neck of GE Power. The 737 MAX issues at Boeing could be good news – more spare parts sales for existing aircraft – while engine issues with that manufacturer’s 777X add to the sense that Aviation truly is the hinge when it comes to GE stock.
Even at GE Capital, it’s not as if investors didn’t know there were problems in the long-term healthcare business. The company took a $6 billion charge in January 2018 related to the unit. An analyst argued last October that reserves still weren’t high enough.
From a broad standpoint, this is a company still in year one of a multi-year turnaround. Power still needs to get fixed. Healthcare is a good business. Aviation likely is as well. And GE Capital seems like a black hole.
None of that is news. Despite $30 billion-plus in asset sale proceeds, none of that really has changed. GE bulls bet a year ago that Culp could turn around a business that still had real value. Bears — myself included — argued that there simply wasn’t that much underlying value anyhow. That argument still holds, and it still hasn’t been resolved.
A Lower GE Stock Price Matters
Indeed, I argued in May of 2018 that, even in a breakup, GE stock probably was worth at most between $11 and $13. And so the price offered in October hardly seemed all that attractive.
Truthfully, $9 doesn’t quite, either. A ~30% decline in BHGE shares takes at least $1 off those targets. The news surrounding GE Capital, even putting the recent report aside, seems modestly worse than it appeared at that point.
But other investors can, and have, come to a different conclusion. There were investors happy to pay almost $12 for General Electric stock less than a year ago. Those who bought the stock then should see the trading of the past eleven months as an opportunity, not a problem.
GE stock remains a bet that Culp can get value out of the “good” businesses — Healthcare and Aviation — while minimizing the damage from Capital and Power. That bet hasn’t been proven right yet, of course. But bulls can at least point the fact that it hasn’t been proven wrong yet, either.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
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