EUR 850.00 For Business Accounts Only

Morningstar | GE Now Slides Into 5-Star Territory

Frustrated with a perceived lack of progress in the power market, GE's board turned to industry vet Larry Culp and ousted CEO Flannery after only 14 months on the job. We think Culp is the right person for CEO. Given an outsider's pedigree, we expect differences in execution under Culp, even as we believe he'll continue sticking with GE's current roadmap focusing on aviation, power, and renewable energy.That said, a successful multiyear turnaround will not be easy. Success in one arena will not automatically translate to another. Under Culp, Danaher was a focused conglomerate known for: 1) acquiring underperforming targets at a discount, and 2) bringing them up to par by getting target buy-in into the Danaher Business System. Culp will need similar buy-in from the heads of GE's business units under any new strategic direction. Even so, there are stark differences. While Culp's skills running an industrial-healthcare conglomerate will complement the smaller GE of the future, GE simply does not have the current firepower for any acquisitions.Similarly, Culp's GE will continue struggling with three key issues: 1) secular threats and missteps at power, 2) anemic cash flow, and 3) lingering liabilities at GE Capital. Power faces threats from renewable energy. Renewables like wind power offer: a) diminished environmental impacts at b) comparably attractive prices. The industry suffers from overcapacity, and poor capital allocation decisions forced GE to take a $22 billion write-down, exhausting nearly all of the segment's goodwill balance. GE Capital, furthermore, remains an overhang on the stock, particularly related to its mortgage, insurance, and litigation liabilities, as well as required additional capital contributions from industrial GE. Compounding these prior issues are GE's credit downgrades, which raise GE's borrowing costs on over $100 billion of interest-bearing liabilities. Ultimately, we expect Culp will lead GE to realize its considerable asset value by aggressively cutting costs, implementing the proposed separations of healthcare and BHGE, exploring further asset sales, and driving improvements to operating efficiency and working capital management.