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Morningstar | GE Ousts Flannery, Elevates Culp to CEO

In a management shakeup that surprised us as to timing but not as to selection, John Flannery has been fired from his post as General Electric's chief executive officer. Replacing him is former lead director Lawrence Culp. We don't plan to materially alter our $15.70 fair value estimate.

In our June 26 note, "GE Begins Its Great Unwind," we had speculated that if Flannery fell short, Culp could be a potential replacement. In this instance, Flannery's pedigree helping turn around GE Healthcare could not spare him. At 14 months, Flannery had a radically shorter tenure as CEO compared with predecessor Jeff Immelt's approximately 16 years. We did not foresee this. The board reportedly expressed frustration over the slow pace of change at GE Power, a sentiment we share. We believe the power market still faces severe secular threats from renewables and overcapacity, so we would expect far more cost-out actions. That said, whether it’s Culp or anyone else at the helm, GE will need time to turn the segment around, and we expect a long road to recovery. We do not foresee a recovery in revenue at GE Power until 2022 (from 2017 levels), and unlike management’s prior guidance, we model only a 3-point margin recovery at the segment profit level (to 8.6%, as opposed to the 10% management guided to). Until we hear reason to think otherwise, we are leaving our estimates in place.

Culp is noted as the individual who helped transform Danaher, so we welcome the choice. While we had previously voiced cautious support for Flannery, we now believe the board came to grips with a couple of points. First, we think Culp brings an air of fresh thinking that GE needs, and we expect some changes to the company's strategic direction. Culp was responsible for helping evolve Danaher’s common operating philosophy, the Danaher Business System, which guided planning and execution. One of the key takeaways is that the degree of buy-in was a huge lever for the success of DBS' implementation. We think Culp will need this sort of buy-in from GE’s heads of units to effectively implement his vision at the sprawling conglomerate. The board probably saw Flannery as too close to home to offer the kind of revolutionary thought to turn around the ship. Second, the board sent a message that everyone at the company will be held accountable and no one--not even the CEO--can escape scrutiny.

GE also said it will take an impairment charge of approximately $23 billion. From our understanding, the impairment charge is not yet finalized but is likely to substantially exhaust all of the remaining goodwill balance at GE Power. We will continue to monitor the situation as more information becomes available. It remains to be seen if Russell Stokes will still be head of GE Power. One point we hope Culp considers is ending GE’s previous practice of shifting segment heads from various positions of responsibility outside their historical purview.

While we expect every strategic avenue is on the table, we still broadly believe that GE will continue with its plan to focus on aviation, power, and renewable energy, given that this is largely the same board that approved the plan announced at the end of June. One thing we are hearing, however, is that GECAS, the aviation unit at GE Capital, is potentially on the block. Given cheaper financing from the Chinese, the company would be selling at the potential peak. We would support the decision, provided that GE could do a composite deal that would allow it to shed some of its legacy assets.