In this segment from the MarketFoolery podcast, host Chris Hill is joined by senior analysts Taylor Muckerman and Jason Moser to analyze General Electric's (NYSE:GE) decision to send CEO John Flannery packing after only a year. He had been tasked with righting a ship that was listing badly, but the board apparently thought he wasn't moving fast enough. The Fools don't exactly agree and talk about why. They also consider Larry Culp, formerly the CEO of Danaher, who is coming in to take on GE's top job.
A full transcript follows the video.
This video was recorded on Oct. 1, 2018.
Chris Hill: We have to start with the big pile of dust that was dropped by the news fairy. That is General Electric. Flannery is out.
Taylor Muckerman: Already?
Hill: The guy's been CEO for just over a year. The board of directors apparently was frustrated by the pace of his decision-making, which I find interesting, Taylor, because given the behemoth that is General Electric and the size of the mess that John Flannery had to clean up, I thought the guy was moving pretty quickly.
Muckerman: Yeah, I figured it was going to take longer than a year. And sure enough, it has. He announced that they sold the Locomotive business, they are planning to sell the Healthcare business, exit their 62% stake in Baker Hughes. Announcements were coming down the pike. Unfortunately, the share price just didn't care. The board ousting him now and replacing him with one of the new board members that they put in place earlier in April.
Hill: We'll get to Culp in a second, the new CEO. Jason, I was really surprised by this news, for a few reasons. One of them, certainly, when I saw this line of reasoning from the board, because, I did think Flannery was moving pretty quickly considering how big that company is. Also, General Electric does not flip CEOs very often. Flannery has been very clear, for all the troubles that GE has had and all of the depths that the stock has hit during his tenure, one of the things we have praised him for, and others have as well, he's been very clear from the outset. He's been a great communicator. He's been very clear about his plan and clear about the fact that this was a plan that was going to take several years.
Jason Moser: Sure. Let's step back to just September 20th. Just a couple of weeks ago on this show, we were talking about GE. I said, if you're an owner of shares today, then you need to take CEO John Flannery's language very seriously when he says that they are in a multiyear transformational journey. In English, I said, you'd better pack a lunch, it's going to take a while. Apparently, these guys at GE don't do lunch.
Muckerman: Power lunch.
Moser: This really, to me, does seem extremely knee jerk. It's hard to not feel like this is just based on the stock getting cut in half over the course of a year. But let's also look at the fact that they're going to write off around $23 billion from goodwill on this Energy acquisition from back in 2015, which was under Immelt's tenure, not Flannery. It's also noteworthy to consider that the $23 billion in goodwill that they're writing off, that's like 30% of the total goodwill on the balance sheet. They still have a lot hanging out there. Now, I mean, in today's day and age, we basically live in a non-GAAP world anyways. Any company can write off any goodwill they want, frame it however they like in the earnings call and just go on about their business. I think this all really goes back to things that Flannery had nothing to do with it.
Muckerman: Same thing with the insurance issue that cropped up earlier this year.
Moser: Yeah! Maybe there's more of the story that we don't know about. But regardless, it seems extremely knee jerk. I don't know that anybody else you put in there is going to be able to get things going any more quickly, any faster. This, as you said, is a behemoth that they're trying to unwind and simplify. That, just by nature, takes time.
Hill: Yeah, he was dealt a very bad hand when he walked in the door. And he knew that. Let's talk about Larry Culp, who is the brand-new CEO and chairman of the board. As you mentioned, Taylor, Culp was brought on to join the board. Was it earlier this year?
Muckerman: Yeah, I believe so. It was February, maybe April, somewhere around there, when they had to bring on new board members out from outside the company.
Hill: Culp was previously the CEO of Danaher. How did he do there? Because it seems like, based on the stock, he did well.
Muckerman: He did very well. The stock up I think around 500%. I just went January 1st of 2000 to January 1st of 2014, didn't use the exact specific dates that he was CEO there, but general range. The market cap went from around $10 billion up to over $60 billion, and the stock followed suit. Definitely a successful tenure there, instituting what he called the Danaher Business System, basically a set of processes and procedures to bring on these acquired businesses that they snapped up over that tenure. It's very well regarded around the world as a business system that maybe he can bring in and infuse within GE and try and turn this ship around.
It seems like some of the groundwork has been laid. See if he continues with the same plans that Flannery laid out. I would imagine that he might, because he was on the board while Flannery was announcing these plans. Familiar with them. Maybe not as familiar with the business as Flannery, because he's the first outside CEO that GE has ever had in 126 years.
Hill: Yeah, this pokes a little bit of a hole in the narrative that we've heard, certainly, for the last 20 years or so of the GE management style and the way that General Electric has groomed its leaders. Flannery was a home-grown guy.
Moser: I have no executive experience but I'm going to offer Larry here just a little piece of advice -- based on what I've seen here up to this point, you might want to steer away from language that includes phrases like "multiyear transformational journey." Apparently, that's just not working out.
Hill: Is that the magic word?
Moser: Apparently! If you say something like that, "Oh, he's just not the right guy for the job. Keep on looking." One thing before we conclude this, I was looking at this earlier, because we just covered Bed Bath & Beyond not too long ago. It started sticking in my mind, these are two very familiar names for all of us, not only as investors but really consumers. And the 10-year charts for these two stocks are just amazingly similar. I mean, over the course of ten years, GE is down 54%. Bed Bath & Beyond is down 52%. When you look at the actual bell curve there, it's something to behold. I think it says a lot to a couple of businesses that were poorly led. One of them, I think, was just out-innovated. One of them just slept at the wheel of innovation in e-commerce. The other one, GE, was just getting outside of its wheelhouse and trying to become too many things.
Hill: But if you had to buy one of those two stocks today, there's no way you're buying Bed Bath & Beyond.
Moser: Oh, no, no, no. I wouldn't buy that with your money. I'm still going to try my hand at General Electric.
Hill: Real quick on the stock, pre-market, it was up about 16%. I'm wondering, Jason, if at least a few people are thinking what you're thinking, that maybe this is a knee jerk reaction. Shares of GE still up around 9% at this point. It's going to be interesting to see, particularly if more information comes out about Flannery's tenure. Based on everything we've heard right now, it seems knee jerk-ish.
Chris Hill has no position in any of the stocks mentioned. Jason Moser has no position in any of the stocks mentioned. Taylor Muckerman owns shares of General Electric. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.