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(Bloomberg Opinion)
Patience is a virtue, but a poor sales pitch.
Shares of General Electric Co. extended a six-day decline on Wednesday and briefly dipped below $12 a share for the first time since the financial crisis — the latest evidence that investors remain skeptical about its turnaround prospects. Institutional investors in aggregate dumped 2.87 million shares of the industrial giant in the second quarter, according to data compiled by Bloomberg from 13F regulatory filings. That’s less than the net 126 million shares that were jettisoned in the first quarter, but marks yet another period of outflows as CEO John Flannery tries to convince investors his proposed breakup will put GE on a better path.
We don’t know exactly when investors cut their positions last quarter. Flannery announced his turnaround plan — which calls for spinning off GE’s health-care unit, divesting its stake in the Baker Hughes energy business and further winding down GE Capital — before the market opened on June 26. So there were four trading days before the end of the quarter when investors had that information. And there were some buyers: notably, Viking Global disclosed a new position in GE valued at nearly $1 billion. That said, GE’s 4.4 percent slide since the presentation indicates enthusiasm is still middling.
After a year on the job and a few misfires, Flannery seems to have finally gotten a handle on GE’s challenges and is putting the pieces in place for a turnaround. Breaking up the company is the right thing to do and perhaps the only way he could implement the type of radical cultural change and attitude adjustment GE so desperately needs. But it’s undeniably a painful and risky choice. And finding the right path is not the same as crossing the finish line.
It has always fascinated me that after everything GE has been through in the past year, the stock’s biggest one-day drop during this period came after a May industrial conference where Flannery proclaimed there was no “quick fix” for the company’s problems. I scratched my head at the time as to why anyone would have ever thought there was a magical button Flannery could push to make this all go away. But I think the continued selling pressure is an extension of that Mayday reaction and an appropriate realization that this is going to be a drawn-out affair.
A lot of things have to go right to make Flannery’s plan work, including things that are out of GE’s control, such as the market reception for its divestitures — not to mention the performance of the broader market and economy. Even if it executes perfectly, the need to earmark asset-sale proceeds for debt and pension pay-down means this plan will lead to significant earnings dilution. The $15 billion reserve shortfall at GE’s legacy long-term care insurance business may widen, and challenging conditions in the power market are unlikely to reverse any time soon.
All of this leads me to wonder whether Flannery’s current breakup plan goes far enough. GE has argued its power and aviation units deserve to stay together because both essentially make engines. Certainly the two businesses have more in common than either had with the health-care unit, but science and technology synergies aside, they are still very different businesses with unique markets and customers. I’m just not fully convinced this is a pairing that lasts over the long-term.
The same goes for plane-lessor GECAS and other legacy parts of GE Capital. GE has said it will divest another $25 billion chunk of energy and industrial finance assets, but it’s unclear why GE Capital needs to exist at all. Flannery has hinted at the “optionality” offered by GECAS. A sale of this profitable business would generate a meaningful amount of cash that GE could use to further cut debt or wrangle problems like the long-term care business. That could potentially free up cash from other asset sales for growth investments.
There are plenty of reasons to stay on the sidelines right now with GE, but there are also plenty of reasons to keep watching.
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