EUR 850.00 For Business Accounts Only

Morningstar | Moving GE to Very High Uncertainty on Concerns With Liabilities at GE Capital

Frustrated with a perceived lack of progress in the power market, GE's board turned to industry vet Larry Culp of Danaher fame and ousted CEO Flannery after only 14 months on the job. We think Culp is the right person for CEO and should help GE realize the value of its assets. Given an outsider's operating pedigree, we expect differences in execution under Culp, even as we suspect he'll largely stick with GE's current roadmap--focusing on aviation, power, and renewable energy--as laid out by Flannery and approved by the current board.That said, a successful multiyear turnaround will not be easy. Success coaching one team does 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 buy-in into the Danaher Business System. Culp will need similar buy-in from the heads of GE's business units under any new 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 currently does not have the firepower for any acquisitions and is moving in the opposite direction.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 writedown, exhausting nearly all of the segment's goodwill balance. GE Capital, furthermore, remains an overhang on the stock, particularly related to the DOJ's investigation into WMC's subprime mortgage lending practices. Compounding these prior issues is GE's credit downgrade, which raises GE's borrowing costs on over $100 billion of its interest-bearing liabilities. Ultimately, we expect Culp will aggressively cut costs, implement the proposed separations, explore new deals, consider cutting the dividend, and restore accountability at the firm.