It was July 2016, and General Electric (NYSE:GE) was on top of the world. The government had just removed its Systemically Important Financial Institution (SIFI) status, which was projected to unlock major value from the company's troubled GE Capital arm. GE had just sold its underperforming appliances unit to Chinese company Haier for $5.6 billion. Its stock was trading at its highest level since 2008. The company seemed to be at a turning point.
Unfortunately for investors, it was indeed at a turning point: a turn for the worse. Here's what's happened over the last two years, and what it tells us about how GE's future might unfold.
In July 2016, it looked like CEO Jeff Immelt was finally catching a break. But fast forward to today, and the market has cut GE's share price by more than half. It's now trading below $15. Immelt resigned in modest disgrace, and his successor John Flannery has struggled to right a floundering ship. The company is the worst performer on the Dow Jones Industrial Average, and there are rumblings that it may not be a Dow company much longer.
Here's how GE's share price changed from then to now. Note the July 2016 spike that took GE to its highest level since before the Great Recession, and how the bloodbath began in earnest in 2017:
Part of the problem was GE's status as a conglomerate comprised of many different business units that function largely independently of one another. Usually, this helps to stabilize a company, as weakness in one unit can be offset by strength elsewhere in the portfolio. Unfortunately for General Electric, the strength it was showing in its aviation unit -- still its strongest business by far -- was more than offset by its tepid power unit, its ailing oil and gas unit, and a transportation unit that sold no locomotives at all for the entire year of 2016.
It's worth pointing out that GE's rival industrial conglomerates Siemens (NASDAQOTH:SIEGY) and Honeywell (NYSE:HON), although far from crushing the market, have both significantly outperformed their larger peer:
The writing on the wall
Even with the obvious problems in the company's transportation and oil and gas units, the writing on the wall was tricky to spot.
With its SIFI status removed, GE's management was able to move money from its GE Capital unit into the parent company's coffers. It then used that money -- as well as money from the sale of assets like GE Appliances -- to buy back shares, which boosted 2016 earnings per share.
In 2015, GE had made a major purchase of the energy unit of French company Alstom, so the growth in GE Power's 2016 revenue -- indeed, the company's revenue -- was due to that acquisition as opposed to organic growth. And, of course, the company wasn't going to be able to keep that up forever (if you really want to get into the numbers on this, check out my colleague Lee Samaha's excellent write-up here).
In Q1 2017, industrial cash from operations missed expectations by $1 billion, largely due to weakness in the power unit. Energy markets were still tepid, resulting in a 33% decline in earnings from the oil and gas unit. It wasn't long afterwards that Immelt announced he was stepping down.
Out of the frying pan
When new CEO Flannery took over from Immelt in summer 2017, I thought the market would take a "wait and see" attitude toward the stock, and give the new guy a chance to get up to speed and roll out his vision for the company. Alas for investors, I was wrong.
Flannery apparently uncovered more of a hornet's nest than he -- or I -- was expecting in the C-suite, In the company's Q3 2017 earnings report, annual earnings guidance was slashed from the $12 billion to $14 billion range down to just $7 billion, and CFO Jeff Bornstein announced his departure shortly afterward.
Shortly after that, Flannery halved the company's dividend, and in January of this year, he announced that after an insurance review, the company would need to take a $6.2 billion charge plus set aside $15 billion in reserves to cover legacy long-term care insurance policies that were still being held by its GE Capital unit, which would effectively end the gravy train of dividend payments to the parent company. Other announcements included the intent to sell the company's consumer lighting and transportation units.
That's a lot of changes in just two years, even for a massive company like General Electric. But those changes give a good sense of where Flannery might take the company from here.
After divesting underperforming units and spinning off its oil and gas business, GE is going to be left with its high-margin aviation and healthcare units, its middling renewable energy unit, and its struggling power unit. And, of course, GE Capital, which is unable to assist the parent company.
Besides continuing its ongoing restructuring and cost-cutting, it's unclear exactly what Flannery can do to significantly grow organic revenue and boost earnings. Siemens' power unit has seen the same weaknesses as GE's, so the problem doesn't seem to have an obvious solution.
However, it's worth noting that, thanks to the collapsing share price -- which finally seems to have stabilized -- GE is currently yielding more than 5% again, far better than Siemens or Honeywell. There may be a good argument for buying in now just for the dividend, but unless and until Flannery and company can outline a compelling vision for returning GE to growth, expect more of the turbulence of the last two years for this troubled conglomerate.