We started an initial investment in the GE company about 16 – 17 months ago. At that time the stock price of GE had fallen by over 30% from it’s recent high of $32 into the low $20’s. As we began our initial purchase, we felt new management was making some headway in their effort to resolve bad investment decisions made by the previous management team. We couldn’t imagine a scenario in which GE would fall to price levels last seen in the 2008 financial crisis – all the way down to the $6.00 level by the end of 2018. Along GE’s rapid price decline, we added to our investment, each time believing that surely GE had reached a bottom and would create a base to build on and eventually regain some of its historical luster and value as an investment.
During the holding period of our investment, GE once again made a management change, convincing an outside board member of GE to take on the CEO role – that person, Larry Culp. Culp has a well-deserved reputation of running an efficient company from his many years at Danaher. While Culp’s reputation gave him a honeymoon period of about two weeks, it quickly became apparent that reputation alone would not save GE.
Culp and his team have been busy since taking on the CEO role. GE has operated as a conglomerate, often difficult to understand where it’s earnings and cash flow came from in the maze of companies housed within GE. Culp and his team have accelerated the process of identifying what businesses they will keep and what businesses they could sell to both streamline GE and to provide much needed cash relief to the company.
The year 2019 should be a low water mark for GE’s businesses from both earnings and cashflow basis. The first quarter earnings report came in better than expected and more importantly, from a cash flow view – less cash burned than expected. Culp was realistic on the earnings call reminding everyone that while the first quarter numbers were better than expected, a lot of work was still ahead of the company to deliver consistent and growing earnings.
We made our investment in GE with a three – five year time horizon. We will continue to hold GE – we are optimistic about Culp being able to turn the company around. However, we would agree with Culp, the process is a multi-year horizon. Not so long ago, GE was a standard of managerial quality – often held up as a standard of excellence for other companies to follow, to be GE-like. So, the question, To GE or not to GE? We expect GE to GE like the GE of old - only this time with a clarity of earnings and cash flow that allows the company to reclaim its former glory.