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GE’s Challenges Linger as Superstar CEO Reaches One-Year Mark

Oct. 1, 2019
All eyes are on CEO Larry Culp as he enters the second year of his GE turnaround.

A year ago, General Electric Co.’s investors cheered the appointment of Larry Culp as the right move to fix the broken company.

But the payoff is taking time to materialize, with GE trading 18% below its level when Culp took the reins. While the Wall Street darling has taken steps to shore up GE’s finances and largely stanched the flow of negative news, he’s still dealing with many of the same problems that confronted him on his first day.

The deflating 12-month stock performance through Monday underscores the magnitude of the challenge Culp took on when he agreed to steer GE through one of the worst slumps in its history. The Boston-based maker of jet engines, medical scanners and gas turbines has struggled with a deep decline in its power-equipment business, as well as cash flow concerns, persistent insurance liabilities and debilitating debt.

“I don’t think there are a lot of people who have the capacity and credibility that Larry has,” said Steve Tusa, a JPMorgan Chase & Co. analyst and GE’s highest-profile critic. “But it’s a huge task to turn such a long-cycle business that is this levered.”

The shares fell 3.1% to $8.67 at 12:01 p.m. in New York as weak manufacturing data fueled a broad market slump.

Culp, 56, has been aggressive. He sold GE’s biopharmaceutical business to Danaher Corp. for $21.4 billion, divested a jet-leasing unit and unloaded part of GE’s stake in Baker Hughes, bringing in fresh cash and easing investors’ liquidity concerns.

He has also asked for patience, saying the turnaround effort will take years. In a note to investors Tuesday, Culp reflected on the achievements in his first year -- including improving operations and winnowing the portfolio -- while acknowledging that the balance sheet still needs work.

“Simply put, we have too much debt, and as I promised we are working to reduce it thoughtfully and soon,” Culp said. At the end of the second quarter, GE had “industrial net debt” of $54.4 billion, according to a regulatory filing.

With the progress GE has made, Culp said he’s “more optimistic now than I was a year ago.” The CEO will provide an update on the turnaround efforts when GE reports third-quarter earnings on Oct. 30.

Early Rally

Culp came to GE with a gleaming resume, having boosted sales, profit and market value at manufacturer Danaher during his tenure there as its top boss. His surprise appointment as GE’s first outsider CEO sparked a 17% rally in the shares during his first week.

A reality check came quickly. In Culp’s first earnings presentation several weeks later, he slashed the dividend to a penny a share, recorded a $22 billion charge related to the power unit and revealed expanded federal investigations of GE’s accounting.

There may have been a mismatch of expectations initially as investors hoped for a quick fix to problems that will take time to resolve, said Deane Dray, an analyst with RBC Capital Markets. After the stock decline late last year, GE climbed 23% in 2019 through Monday, slightly ahead of a Standard & Poor’s index of U.S. industrial companies.

“He was a storied CEO coming into a vortex of risk,” Dray said. “It’s been triage, but we’re nowhere near the crisis that was going on when he walked in the door.”

To-Do List

Culp still has a number of tasks on his to-do list, including naming a new chief financial officer, wrapping up portfolio changes and fixing the power business, Dray said. A rebound in GE’s share price could “coincide with the pace of turnaround in power.”

In the long term, however, Culp’s rescue attempt could weigh on results by leaving the company smaller and more constrained, said Bill Campbell, director of research for Paragon Intel, which analyzes new CEOs.

“What’s the earnings power of a post-divestiture GE?” he said. “The market needs to start evaluating what the company can actually earn and how much cash they can generate once they divest all these businesses.”

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