What Nelson Peltz wants, Nelson Peltz gets...or does he?
The activist head of Trian Partners wanted big growth from his $2.5 billion stake in General Electric (NYSE:GE). But he was reportedly upset at CEO Jeff Immelt's inability -- or refusal -- to meet Trian's lofty short-term performance goals.
Now Immelt is out. Here are three things investors should know.
The benefit of the doubt
It's tempting to see this as a victory for Peltz's Trian Partners, which had been more or less openly feuding with Immelt as he missed the company's performance goals (taking a salary hit in the process). But on Monday's call, Immelt stressed that the transition timeline of summer 2017 had been finalized back in 2013.
That's very interesting, as it means that the majority of Immelt's transition items -- the GE Capital asset sales, the Synchrony Financial spinoff, the Baker Hughes spinoff, etc. -- were executed knowing that he would step down, possibly even before they concluded (the initial GE Capital divestiture timeline was announced in 2014, and the asset sales were set to be finalized by the end of 2018).
Throughout the process, Immelt has taken a lot of heat from investors unhappy with the stock's lackluster performance, particularly Trian, which had lofty goals for GE. The company's stock price jumped nearly 5% on the news of Immelt's impending retirement, indicating that the market is more than willing to give the new guy -- incoming CEO John Flannery -- the benefit of the doubt. Even if Flannery pursues exactly the same strategy as Immelt, investor and stakeholder confidence are likely to improve. That will be an asset to the company -- and its investors.
Breaking up is hard to do
But the way forward isn't exactly clear. There have been calls for GE to be broken up into its component parts, or at the very least, for it to sell off underperforming businesses. And Flannery, who has been with the company since 1987, has some experience in doing just that, having worked on the 2015 Synchrony spinoff and the sale of GE Appliances to Chinese company Haier in 2016.
In an investor call on Monday, Flannery refused to take anything off the table in terms of selling businesses or even breaking up the company. He instead promised to conduct an immediate review of "all aspects of the company." He pledged to proceed with "with speed and with urgency and with no constraint," and to report back "in the fall."
Several analysts attempted to get more information on where he might be heading, asking -- for example -- what sort of value he placed on the company's cross-platform research and development efforts, also known as the GE Store, or its cross-platform digital applications. But Flannery played his cards close to the vest, consistently saying that he wanted to conduct the review first before commenting.
Bottom line: Flannery may have ideas about what he wants to do, but if he does, he ain't sharing! Investors should assume that anything and everything is on the table, and that GE may look very different in 2020 -- or may look almost exactly the same.
Down the road
Without knowing what Flannery's long-term plan for the company is, it's hard to predict what's in store.
For example, it's tough to see what businesses GE could sell without a major corporate disruption. According to a leaked internal memo, GE is already looking for buyers for its lighting unit, the last remaining consumer business it operates. GE Water is already up for sale, and GE Oil and Gas is going to be merged with Baker Hughes and then spun off as a separate company. Ditching a major business arm like Transportation or Healthcare -- which Flannery has led since 2014 -- could come at a cost, as an independent business would no longer benefit from GE's global footprint, supply chains, GE Store, or powerful brand.
Luckily, Flannery clearly understands this. On Monday's investor call, he took great pains to point out that he has experience evaluating businesses from an investor's standpoint, having spent the first 20 years of his career "in investing," working in risk management at GE Capital and in portfolio management at GE Equity. But he also was able to articulate the benefits of GE's current portfolio, which he admits is "built to co-depend." He also expressed admiration for Immelt's tenure, saying that "people underappreciate the changes that have been made to the company."
Flannery steps into the job in a time of transition and chronic underperformance for the company. The job comes with big risks, but thus far, he's doing a great balancing act: showing all sides he's aware of the challenges, but saying next to nothing about his long-term (or even medium-term) plans.
Flannery has a history of good performance with the company, leading the turnaround at GE Healthcare, and presiding over record growth in India in the wake of the financial crisis. The market seems to already be giving him the benefit of the doubt. Perhaps that's all the stock needed to shake off its lethargy.
Investors should be cautiously optimistic, but will have to wait until the fall to get a full sense of what's in store over the long term. Still, with GE currently trading at about $29 per share, sporting a 3.2% dividend yield and a forward P/E ratio near historic lows, it might be worth picking up a few shares in spite of the uncertainty.