Groundhog Day is fast approaching, and on February 2, a bunch of us will watch Punxsutawney Phil pop his head out of his hole for a brief moment, and then vanish from the news for 364 days.
Two days prior to that, an equally elusive figure will make a scheduled appearance. On January 31, General Electric's (NYSE:GE) new CEO, Larry Culp, will report fourth-quarter 2018 earnings at the troubled conglomerate. While it hasn't been a whole year since we saw him last, Culp has been a bit like Punxsutawney Phil lately: He popped up on CNBC for an interview on November 12, and investors haven't seen or heard from him since. In fact, there's been a deafening silence from GE's C-suite lately, even prior to the traditional pre-earnings "blackout period." Here's why that should worry investors.
It's not like GE doesn't know how to roll out a new CEO. Immediately after former CEO John Flannery's appointment was announced -- months before he officially took the helm from outgoing CEO Jeff Immelt -- GE arranged an hour-long conference call (billed as a "succession investor meeting") with analysts to introduce him to the world. And although he didn't reveal a lot of noteworthy information in that call -- citing the need for a full strategic review of the company -- he did his best to project a steady hand at the wheel.
In subsequent months, Flannery and new CFO Jamie Miller gave numerous strategic and operational updates through conference calls, earnings calls with Q&A sessions, various industry conferences, interviews to news outlets, and even a LinkedIn article about the company's strategy, authored by Flannery.
By contrast, Culp has been extraordinarily tight-lipped. He gave no introductory conference call after Flannery's abrupt ousting on October 1, and apparently he wasn't particularly forthcoming to individual analysts, either. Deutsche Bank analyst Nicole Deblase issued a note that read in part, "After speaking with the company, we do not come away with much beyond what we read in this morning's release."
Culp's first conference call was the company's Q3 earnings call on October 30, during which he took no follow-up questions. He did a Q&A with The Wall Street Journal that day, and a lone interview with CNBC two weeks later. And that's it. No presentations, no conference calls, and beyond a couple of sentences here or there in press releases, no other statements that I could find in his more than three months on the job. In the meantime, the stock price has fallen more than 20%.
The new guy
Quality trumps quantity, so of course the number of interviews a CEO gives doesn't matter as much as the substance of what he says. I'd much rather have a CEO go into great detail on a quarterly earnings call than give weekly addresses that say hardly anything. Unfortunately -- at least, so far -- Culp hasn't said much of substance, particularly any specifics about what investors can expect moving forward.
Culp deflects some questions about his plans by using the "new guy" excuse. It's certainly true that he's not been with the company very long. In fact, he's GE's first CEO not to have been promoted from the company's internal ranks. However, he has been on the company's board since April 2018.
This gambit was on display in the Q3 2018 earnings call:
Andrew Kaplowitz, Citigroup analyst: [W]hen we think about next year, are there any guideposts you would give us at this point as you reviewed the businesses, Larry? Should the Power business in particular be less of a drag on cash in 2019?
Culp: I hope that you and others will appreciate that when we talk about numbers on a forward-looking basis, we want to do so with conviction and confidence. I don't want to fool you, let alone myself, on thinking 30 days in that I can give you that today. So with respect to the quarter and certainly the outlook for next year, there will be a time and place for that. But make no mistake, we know that the Power business has to perform better and that is what we're going to spend a ton of time on once we get past earnings today.
Culp is hardly the only CEO to give non-answers in response to analysts' or interviewers' questions. Certainly Flannery punted several questions in his early days as CEO by asking people to be patient and wait for the results of the strategic review he was conducting. But here's why it's more concerning coming from this CEO, at this company, at this time.
GE has had an unfortunate history of keeping investors in the dark about key aspects of the company. For example, when GE was selling off its GE Capital businesses in 2015 and 2016, it didn't reveal the sale prices or the value of those businesses. Instead, it invented a completely new metric called "Ending Net Investment" that it used to report on the dispositions.
More recently, there have been unpleasant surprises for investors, including unexpected revelations of big financial problems in GE's power division, resulting in a massive writedown, and a big money-losing insurance business that would prevent GE Capital from sending more dividends to the parent company. The Wall Street Journal suggested that some of this was due to "aggressive" accounting maneuvers. Forbes contributor Peter Cohan went a step further, referring to GE's books as "cooked."
All of this is to say that General Electric has an existing transparency problem. On one hand, by not saying anything specific about what investors can expect from the company -- beyond the fact that Flannery's "strategic intent," announced in June, still "stands today" -- Culp isn't making the same mistake as Immelt made, of presenting overly rosy projections to investors. But with so many shoes having dropped -- including Culp's surprise October slashing of the dividend to just $0.01 per quarter -- the lack of anything resembling a concrete plan makes investors wonder if there's another gut punch lurking just around the corner.
Indeed, Gordon Haskett analyst John Inch made waves on January 23 when he suggested that GE's massive "outsized off-balance sheet liabilities" could have a serious impact on the company. Meanwhile, on the balance sheet, GE is accounting for $37.8 billion of "other" liabilities that could be just about anything...and could be massively understated. Plus there's the nagging question: if Flannery's plan is still in place, why was he ousted as CEO?
Lack of transparency at GE has presaged big problems for investors. And the lack of transparency now seems worse than ever. With so many jarring surprises knocking the stock around lately, the biggest concern investors should have is that there's another one coming down the pike that hasn't been revealed, that's going to send the stock even lower.
The fact that Culp hasn't presented a clear picture of what he envisions as the path forward for the company makes me worry that either the company doesn't yet have one (which is bad), or that it has one, but knows investors aren't going to like it and is holding off releasing it until the last possible moment (which is worse).
Until Culp and his management team can present a clear and realistic plan for the company's future -- and concrete assurances that there are no more surprises lurking -- investors should steer clear of GE.