General Electric (NYSE:GE) has been in turnaround mode since the 2008-09 recession. The industrial icon has jettisoned a series of businesses along the way in an effort to raise cash and streamline around a smaller core. It has been a difficult road, to say the least, with the stock trading hands today at roughly the same price as it did during the worst of the so-called "Great Recession."
Still, while the most recent asset sale was small by historical standards, it makes a statement about the future. In fact, long-term investors might want to spend a moment to contemplate where GE has been and where this deal suggests it is going today, because a lot has changed over the past decade.
A troubled time
Many in the business and investment communities have given Jack Welch accolades for his time at the helm of industrial conglomerate GE. However, it was under his watch that the company allowed its finance division to stray well beyond its core purpose of helping customers purchase expensive GE products (like jet engines and power turbines) and into things like mortgages. When the Great Recession hit, Welch's successor, Jeff Immelt, was left to deal with the fallout of Welch's actions.
The company took a government bailout, wrote down assets, cut the dividend, and began to sell divisions. That included giving up NBC, among many other divisions. For a time it looked as though GE had regained its footing, but the finance division continued to cause problems, and Immelt made a couple of ill-timed acquisitions. In 2017 he was ousted and replaced by insider John Flannery. There were asset write-downs, more restructuring efforts, and a dividend cut. After roughly a year, however, Flannery was out, too, replaced with outsider Larry Culp, who helped to turn around industrial peer Danaher.
Once again, there were write-downs, more restructuring efforts, and a dividend cut. At this point, GE is a much leaner company, but the asset sales still aren't over.
A tiny move that makes a statement
The most notable transaction of late was GE's sale of a piece of its healthcare division to Danaher for around $21 billion. At the same time, the company still owns a multi-billion dollar stake in Baker Hughes, acquired via a complex merger/spin-off transaction that effectively gave GE a way to exit the oil and natural gas drilling space. The problem is that some industry watchers have suggested that GE's attempt to raise cash by exiting its stake in Baker Hughes looked like a desperate move to escape an out-of-favor sector; meanwhile, the healthcare sale, while providing much-needed cash, led GE to jettison a piece of one of its best-performing divisions.
Now GE has agreed to sell what remains of one of its most iconic divisions -- lighting. This roughly 130-year old business goes back to the very core of the company, which once used the line "GE: We bring good things to light" in its advertising. In the grand scheme of things, it's a tiny deal, amounting to just $250 million, according to The Wall Street Journal (actual deal terms weren't disclosed). But this move is a much bigger statement than the dollars involved suggest.
What remained of lighting was largely consumer-focused, an area that GE no longer really plays in, having gotten out of things like appliances years ago. Moreover, lighting is a relatively low-margin business that adds little to the top and bottom lines. From a strategic perspective, it was time to finally sell the business, even if it didn't bring in much money. More important, perhaps, the move helps set the tone for the future.
The company is clearly circling its wagons around four major divisions: aviation (nearly 36% of first-quarter sales), healthcare (25%), power (about 22%), and renewable energy (the rest). All of these divisions are focused on selling products to other companies or large entities. At one time lighting was an important business that was held up as a symbol of GE's history, but today it doesn't cleanly fit into any of its core focus areas. That ultimately made it something of a distraction. Worse, the margins were meager at best, according to industry watchers.
That's notable because aviation and healthcare both posted mid-to-high-teens segment margins in the first quarter. This is the type of performance GE is looking for, if not better -- both divisions are capable of achieving 20% or higher segment margins, as they did at times in 2019. It doesn't make sense for management to spend time and money on a small division with weak profit margins when there are large, profitable divisions to focus on. Power and renewable energy, meanwhile, have been struggling to get back into positive territory with regard to segment margins. While lighting may have been a more profitable line of business than these two divisions overall, it was so small that the time spent on it wasn't meaningful to the larger business. Putting the extra time and energy into turning around larger and struggling divisions simply makes more business sense.
Now combine this move with the sale of a piece of the healthcare division (arguably the company's "crown jewel" segment) and you create an even bigger statement: GE is clearly willing to revisit everything as it looks to turn its business around. Bringing in Culp, an outsider CEO, may have helped in this push, but he really just sped up a process that seemed to be taking shape anyway. At this point, GE is not the same company it was when Welch was CEO, and that's finally starting to look like a good thing. Creating a leaner, more focused GE has long been a key piece of the turnaround plan, and it is finally starting to look like that piece of the puzzle is nearing completion.
More work to be done
All of that said, GE's turnaround is still a work in progress. With the cash from recent divestitures, it is on much stronger financial ground than it was not too long ago. However, two of the company's four divisions are still struggling. And the other two divisions have to contend with what will likely be a global recession, thanks to the worldwide effort to slow the spread of COVID-19. Long-term investors should be in no rush to jump aboard General Electric. But it might be worth watching the company more closely at this point to keep an eye on the turnaround progress. At some point, perhaps relatively soon, GE's outlook will start to look up again as it reshapes itself for the future.