Summary
- GE has made drastic improvements to the company's finances, business, and management.
- GE is being battered by pandemic-related headwinds; however, these are surmountable problems and GE's long-term outlook remains promising.
- GE elicits a hold rating.
Source: General Electric Plant
General Electric's (GE) stock has been on a rollercoaster ride this past year gyrating from highs of around $12 a share before being pummeled to all-time lows amidst the Coronavirus Pandemic. GE shares have exhibited a strong resurgence in recent months amidst growing investor optimism, a strong comeback under new leadership, and material improvements across GE's businesses. This article articulates my bullish investment thesis on GE, discussing business advantages, fundamental analysis, valuation, and current headwinds.
Material Improvements Have Been Made
Having covered GE in the past, I have always kept an open mind regarding the company's prospects. Under the previous CEO John Flannery, although material strides had been made to divest unprofitable operations, increase cash flow, and improve the positioning of the business, GE continued to be burdened by stagnating turnaround efforts, unrealistic guidance, and executive indecision. When news was released that Flannery would be stepping down and Larry Culp would be assuming the role of CEO it promised a new vision, management style, and results for the company. I can say this unequivocally that Larry Culp's ascension as CEO of General Electric has been one of the best decisions GE has made in decades. Credit to Flannery, progress was made but Larry Culp is going to bring GE over the goal line. Overall GE's business has drastically improved and prospects remain encouraging.
Debt has historically been a preeminent concern for GE; however, in recent years, GE has drastically improved its balance sheet and operating leverage ratios. GE has reduced its long-term debt from over $390 billion to present-day levels of $79 billion marking an 80% reduction in long-term debt levels facilitated over the past 10 years. GE's substantial debt reduction will free up cash flows, minimize debt service payments, streamline operations, and provide GE with increased financial and business flexibility for investments in strong businesses, acquisitions, and strategic business initiatives. Larry Culp has overseen a drastic reduction in operating expenditures, employee headcount has fallen 40% from 313,000 employees in 2018 to 189,000 employees in 2020, total long term debt has fallen 43% from $135 billion in 2018 to present-day levels of $79 billion, and GE has drastically reduced its non-beneficial ownership interest in Baker Hughes selling 144 million shares and reducing its ownership interest from 50% to 36% tendering cash receivables of $3 billion. Culp has continued divestitures of non-performing assets providing a cash infusion to GE's balance sheet. GE netted $3 billion from its Baker Hughes divestiture and $20 billion from GE's BioPharma divestiture. Overall, GE now boasts a much more manageable debt load with a financial debt to equity ratio of 2.3:1 which although high is a drastic improvement from before, and management has outlined further debt reduction initiatives in the coming years. GE has also amassed sizable liquidity reserves of $86 billion, various divestitures and asset sales have bolstered GE's liquidity position and the company is well-capitalized.
