EUR 850.00 For Business Accounts Only

Morningstar | While the future is uncertain, we believe GE will ultimately win its fight for survival.

General Electric’s recent problems can be traced to one thing: culture. Under former CEO Jack Welch, the company employed financial engineering that ultimately detracted from shareholder value. When Jeff Immelt took the reins, he worked too slowly to address many of GE’s problems. Worse yet, key decision-makers around Immelt failed to challenge consensus for fear of reprisal. In his 16 years at the helm, Immelt exacerbated these issues with a poor record of capital allocation. Today, Immelt’s successor John Flannery has embarked on a turnaround of GE, wisely choosing to restore accountability and focus on three core businesses:aviation, power, and renewable energy. Even so, we believe GE will continue to struggle with three key issues it will ultimately overcome: 1) Secular threats facing GE Power, 2) a lack of liquidity, and 3) lingering liabilities at GE Capital. Power is under threat from renewable energy. Renewables like wind power offer an attractive alternative form of energy, both from a levelized cost of electricity and a diminished carbon footprint. The industry also suffers from overcapacity, and under Immelt, GE ramped up production at Power and overpaid for Alstom, even as the threat of renewables loomed on the horizon. That said, we think some of these issues are cyclical and predict a modest recovery from the current trough.Flannery’s latest proposed moves to separate both healthcare and oil and gas will help move the needle toward a net leverage ratio of 2.5 times. However, we think Flannery will be continually forced to walk a fine line--as the company pares assets and refocuses its portfolio, inevitably these actions will curtail the free cash it can allocate toward a turnaround. Even so, we think these proposed actions go a long way toward placating credit rating agencies threatening a downgrade and raising some much-needed immediate cash.Finally, while GE Capital still has some continued exposure to legacy operations, including long-term care reinsurance and discontinued mortgage operations, we think most of the worst news is behind it and see it neither destroying or creating value by 2020.