General Electric’s (GE) incoming CEO John Flannery is set up for success. And a big reason why is because his predecessor Jeff Immelt set the bar low.
GE
was looking less and less like an industrials company and more like a
finance company during the early years of Immelt’s tenure as CEO.
Immelt, who took the helm in 2001, learned the hard way that this was
not a good move, as GE got slammed right along with Wall Street’s big
banks during the 2008 financial crisis.
Since
the recession that followed, GE has shifted its business away from the
financial sector to once again become a more focused industrial
company. Analysts say this shift has been under-appreciated and marks a
good setup for Flannery. They say the company’s exposure to cyclical
industries like large infrastructure and aerospace equipment should
prove lucrative in what seems to be the late stages of the economic
recovery.
Source: Barclays research, company data
Acquiring core businesses and selling off non-core businesses
The company spun out Synchrony Financial,
its private label credit card business, for $21 billion in 2015. This
was just part of the $260 billion in GE Capital divestitures that Immelt
oversaw. By next summer, the financing business will include only
“captive finance” such as aircraft, power project and health care
equipment leasing.
In addition to shedding most of its financials business, the company has also shed other non-core units. In 2009, it sold GE Security to United Technologies (UTX) for $1.8 billion. In 2013, it sold NBC Universal to Comcast (CMCSA) for $18 billion. In 2016, it sold GE Appliances to Haier for $5.8 billion. And more recently, it sold its water and process technologies business to Suez for $3.4 billion in 2017.
“The
end of the traditional industrial conglomerates is nearing,” according
to Barclays’ Scott Davis. “Complexity kills creativity, complexity
embraces bureaucracy, complexity is not something that investors want.
Investors want to be able to isolate the risk in their portfolio down to
tangible things. They don’t see the advantage of owning a company
that’s in so many different sectors.”
Meanwhile,
the company has embarked on major industrial acquisitions that position
it for late-cycle growth. It bought Alstom in 2014 for $9.5 billion and
Baker Hughes in 2016 for $25.2 billion, again focusing the portfolio.
Flannery is set up for success
Flannery,
who will take over as CEO on August 1 and most recently ran GE
Healthcare, is expected to be more aggressive in transforming the
company going forward. Potential changes could include a spin-out of
health care and the shuttering of some ancillary businesses, according
to Barclays.
A
GE “lifer,” Flannery spent most of his time at GE Capital and in
corporate roles, including as head of M&A, as shown in the graphic
below.
Source: Barclays research, company data
While GE’s operations are better-positioned than they were a few years ago, investor sentiment has yet to improve.
During Immelt’s tenure, the stock has significantly underperformed the market, rising only 11% versus the market, which surged 114%.
Those numbers look especially paltry when compared to the 4,000% return
under his predecessor Jack Welch, who was CEO from 1981 to 2001.
“Quite
frankly, GE just needs a new messenger,” Davis had written before
Monday’s announcement. “Investors had lost complete faith … Jeff Immelt
has not put up the numbers.”
Expectations
are always high for any incoming CEO. Fortunately for Flannery, GE’s
operational structure is much cleaner than it was, and the bar for stock
returns have been set very low.
Yahoo finance
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