EUR 850.00 For Business Accounts Only

Morningstar | We're Long-Term Believers in GE and Larry Culp, but No Longer Find the Risk/Reward As Attractive

We believe industry veteran Larry Culp is the right person to lead the long-term turnaround of General Electric. Given his outsider's pedigree, we expect Culp will continue his dispassionate analysis of GE's businesses and take decisive action to stop the cash burn at GE Power, address GE Capital's lingering liabilities, and position GE's remaining industrial businesses to operate from a position of strength. We further continue to expect key execution differences from predecessor John Flannery, who we believe was burdened by operating within the GE system. For proof, we point to Culp's astute decision to sell the highly desirable GE biopharma business, and retain the remaining portions of Healthcare.Even so, a successful multiyear turnaround of the industrial conglomerate will not be easy. There are stark differences betweeen Culp's current role and his prior role successfully running Danaher. The GE turnaround story begins at ground zero with the notoriously fickle and long-cycle power market.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 insurance liabilities, as well as required additional capital contributions from industrial GE. We estimate these contributions amount to a run-rate of just over $2.4 billion per year from 2020 to 2023, after a $4 billion contribution in 2019. Compounding these issues are GE's recent credit downgrades, which raise GE's borrowing costs on over $100 billion of interest-bearing liabilities. Ultimately, we expect Culp will position GE's operating business for long-term success by aggressively cutting costs, implementing the proposed separation of BHGE, exploring further asset sales, and driving improvements to operating efficiency and working capital management.