GE's turnaround finally starts to take hold.
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Jan 3, 2020, 8:24 PM (14 hours ago)
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CHESTO MEANS BUSINESS
Bringing good things to life?: Don’t look now, but there’s a turnaround in the making over at General Electric.
I know, I know. You’re skeptical. If you own GE shares, you’ve been burned before. But the stock rose 53 percent over the course of 2019, the biggest annual increase for the struggling Boston company since the 1980s.
GE went from being one of the biggest laggards in Massachusetts, to one of our fastest gainers. In both 2017 and 2018, GE was the worst performer among the state’s 25 biggest public companies. In 2019, GE’s increase put it in fourth place among that group (Teradyne was the winner, by the way); its growth easily exceeded the nearly 30 percent rise in the Standard & Poor’s 500.
Cynics would say the stock was down so low, it had nowhere to go but up. Can you blame them? Consider the severe losses in value that investors suffered as they watched the stock plummet to the $8 range a year ago -- especially those who held the stock since its peak of around $60 back in 2000. But GE proved resilient last year amid continuing setbacks and challenges such as the grounding of the Boeing 737 MAX, or a blistering report from famed financial investigator Harry Markopolos.
So what happened? Much of the credit goes to no-nonsense chief executive Larry Culp. GE’s first outsider CEO has, by many accounts, instilled a major culture shift during his first full year at the helm of a still-sprawling conglomerate, one that employed 283,000 people as of a year ago. Pare back the debt. Get serious about controlling expenses. Focus on the front lines. More transparency. Fewer surprises.
So can Culp continue the momentum in 2020? Could he even get the cash flow back to the point where GE can consider restoring the quarterly dividend, cut to 1 cent a little more than a year ago?
Some cynics still have their doubts — most notably, perpetual GE bear Steve Tusa at Goldman Sachs. But others, such as William Blair & Co. analyst Nick Heymann, see better times ahead. Here are a few factors to watch in the coming weeks and months.
Turbulence at Boeing: GE’s aviation division is the crown jewel, a massive profit center. That’s why investors are waiting to see when orders pick up again for the 737 MAX, the Boeing jet that was grounded last year after two deadly crashes. GE provides engines for those jets through a joint venture, CFM. The grounding sucked some $400 million out of GE’s cash flow in just one quarter. Morningstar analyst Joshua Aguilar says the CFM venture has offset some of the damage by picking up more work for Airbus jets. And Heymann remains optimistic that the aviation group will see a big lift once those MAX orders finally resume. Keep an eye out for GE’s fourth quarter earnings, on Jan. 29, for more.
Healthy returns at healthcare: Culp pivoted from a previous plan to spin off GE’s successful healthcare business based in Chicago. Why? Well, he happened to land a deal to sell the biopharma operations within that division to his old company, Danaher, for $21 billion. The Danaher deal was rumored to be in jeopardy, but all signs are a go, and it could close any week now. So what does that mean for the rest of healthcare business? For now, it’s staying. The cash flow is simply too important. That said, healthcare is strong enough to be a standalone business, and it may eventually be spun off or sold off -- assuming GE’s struggling power business finally gains traction.
Looking for new energy: Culp made it Priority No. 1 to right the ship at the money-losing power division, which was hobbled by a slowdown in the natural-gas turbine market and the overpriced acquisition of Alstom's power-and grid businesses in 2015. The renewables division seems more promising. Peter Cohan, a management lecturer at Babson College and longtime GE shareholder, says he is still waiting for GE to prove it has a new growth engine. Maybe GE can find it in offshore wind as East Coast states compete with each other over who can be the greenest, by lining up wind farm contracts. GE has signed its first two preferred supplier agreements for its Haliade-X, deemed the most powerful offshore turbine in the world. But these monsters won’t be commissioned until 2022, at the earliest.
Home sweet home: Amid all the chaos, Culp and his team finally have some stability on the home front. Roughly 250 employees just moved to the company’s permanent headquarters overlooking the Fort Point Channel, from temporary digs established nearby after the company’s 2016 move from Connecticut. Yes, Culp jettisoned plans for a fancy 12-story tower next door, as well as the state financial incentives tied to the bigger HQ project. Still, it must feel good to move into a new home, built specifically with GE in mind. A fresh start. At least this part of the puzzle is finally solved.
Jon Chesto is a Globe reporter. Reach him at jon.chesto@globe.com and follow him on Twitter @jonchesto.
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