General Electric's [GE] CEO Larry Culp has had a dramatic first year in charge. Having ousted John Flannery in a boardroom coup, former Danaher boss Culp has launched a campaign to get the iconic American manufacturer back on track. But it's been anything but plain sailing.
In early December, just two months after Culp took charge, GE's share price infamously hit an all-time low of $6.72. And while the stock has since gained 27%, it is actually trading 23% lower than when Culp took charge.
What happened in Culp's first year?
Culp has described 2019 as being a 'reset year' for GE as he struggles with reducing debt and strengthening the overall business.
Almost immediately he split the struggling GE Power company into two, bringing back former GE vice chairman John Rice to lead the resulting new gas unit. Culp also booted out KPMG as its auditor after more than a century of keeping the books following a string of accountancy problems.
Culp’s other tough decisions include cutting the dividend, selling GE's biopharma arm to his former employer Danaher for $21.4 billion, and unwinding GE's 62.5% stake in Baker Hughes.
The biggest shock of Culp's tenure so far came in August. Investigator Harry Markopolos revealed that GE had committed billions of dollars in accounting fraud. This revelation wiped $8 billion off the stock's value in one day. While the stock has recovered since then, it's a reminder that Culp's efforts to stabilise the company are far from over.
But with the obvious cost-cutting measures already underway, the question is what other options does Culp have left in his second year in charge.
How has the stock performed?
Despite Culp’s efforts to streamline the business, the share price is still struggling. Over a 12 month timeframe, GE's stock is down more than 37%. And since the start of August, it has been trading below both its 50 day and 20-day moving average.
To make matters worse, in August the number of GE shares shorted was 129.9 million, up from 93.88 million the previous month. While this only represents 1.5% of shares floated, the hope will be that this trend starts to reverse in the mid- to long-term.
GE's stock decline over the past 12 months
In July UBS downgraded its rating on GE to Neutral. At the time, UBS analyst Damian Karas said in a note to investors: "A notable decline in interest rates and ongoing power market weakness drive our more balanced valuation upside/downside.” UBS also lowered its price target on the stock from $13 a share to $11.50 a share.
However, some optimism does exist within the analyst consensus. GE carries an average price target of $10.61, a 24% upside on the current share price.
Where next for GE?
Depending on your viewpoint, Culp's options for his second year at the helm are starting to look limited.
From here on in, a rally in the share price could depend on GE riding out the current economic conditions, and contractions in the US manufacturing sector not getting any worse.
|Operating Margin (TTM)||6.29%|
|Quarterly Revenue Growth (YoY)||-1.10%|
General Electric share price vitals, Yahoo Finance, 07 October 2019
However, if Culp can make progress on his stated aim to reduce debt levels, traders might start to get behind the stock. Total debt stands at $109.85 billion and Culp has said work is needed to fix GE's cash flow problems, conceding that free cash flow in 2019 is likely to be in negative territory.
Continuing to wind down GE's stake in Baker Hughes should help chip away at the debt pile. Other options for Culp include divesting GE's healthcare operations, which was on his predecessor's hit list.
Clearly, there is work left to do, but is Larry Culp still the best choice to pull GE back from the abyss? Well, Morningstar Inc. analyst Joshua Aguilar thinks so:
"In my view, he's the best guy for the job they could have gotten, period," Aguilar said. "If he leaves, the company is toast."
“If he leaves, the company is toast” - Morningstar Inc. analyst Joshua Aguilar