General Electric’s Decline
Several decades of strategy mistakes, market difficulties, and outside forces contributed to (GE)'s value destruction. Corporate strategy, leadership, and the significance of responding to changing market dynamics can be learned from GE's decline, which betrays the company's former status as an American industrial innovation and management excellence paragon.
Multiple factors contributed to (GE)'s downfall, including the company's over-diversification, GE Capital's vulnerabilities, poor leadership and strategy, the inability to respond to changing markets, financial engineering techniques, problems with the company's balance sheet and debt, and hurdles posed by regulators and courts. The expansion was spurred by GE Capital's success and the company's diversification strategy in the beginning, but losses and a bailout from the government following the 2008 financial crisis revealed serious weaknesses. Aggressive growth and high-profile acquisitions at peak values, which were moves made by CEOs Jack Welch and Jeffrey Immelt, set the stage for future issues, particularly when those sectors experienced downturns. (GE)'s severe stock price decline and dividend reduction were the result of the company's inability to adjust to changes in technology and the market, as well as its obsession with short-term stock performance, an inflated balance sheet, and excessive levels of debt caused by bad acquisitions and the crisis. The necessity of strategic concentration and market adaptability is highlighted by the fact that (GE) 's journey to restoring its former grandeur is still quite challenging, despite the company's restructuring efforts and emphasis on its industrial core.
The Turnaround Story
With a focus on decreasing debt, strengthening core businesses, and streamlining operations, (GE) has been pursuing a complete turnaround plan to handle the various issues it faces. Simplifying its business strategy, the corporation divested non-core areas to increase operational efficiency and focused on critical industrial sectors including aviation, power, and renewable energy. It also underwent substantial restructuring initiatives. Sold assets, particularly its BioPharma division and a portion of Baker Hughes, helped reduce debt, which was a critical component of this plan. The goal of (GE)'s technology innovation and digital solutions is to strengthen its key industrial segments, which will lead to more dependable income streams and better customer results. Capital allocation efforts centered on responsible investment and shareholder returns, while lean management principles sought to increase efficiency and value creation.
Breaking Up
The company's announcement in November 2021 of its intention to split into three distinct organizations is a critical component of the ongoing turnaround.
(GE) announced intentions to spin off multiple divisions to concentrate on core skills and simplify operations. As part of this process, (GEHC) was spun out so that it could focus on healthcare and medical technology innovation and growth. Furthermore, GE intended to spin off its renewable energy, power, and digital divisions to spearhead energy transformation with a diverse set of skills after merging them into an energy-focused single organization. Taking advantage of its dominant position in the aerospace and defense sectors, (GE) would continue to own and operate GE Aviation, a top provider of jet engines and aviation services.
As part of its strategy to build more targeted and nimble companies that can better respond to shifts in the market and grab growth opportunities, (GE) is taking these strategic actions. The details of each spinoff, including the allocation of shares, are contingent upon regulatory clearances and market circumstances; once completed, each newly independent firm is anticipated to gain more operational flexibility and a stronger emphasis on consumer demands. Each of (GE)'s new divisions will have the chance to become a market leader, marking a radical departure from the conglomerate model of yesteryear. Market expectations are high for the implementation and results of these spinoffs because of (GE)'s legendary past and the possibility that these moves may alter the worldwide industrial scene.
Leadership
Lawrence Culp Jr. has led a huge transformation at (GE) , focusing on turning around failed business units and reducing the company's debt. Even though the COVID-19 outbreak made things hard, Mr. Culp was able to separate (GEHC) on January 4, 2023. Coming up, (GE) also plans to split off its power & renewable business, GE Vernova, by April 2024. GE Aerospace will still be the parent company of GE Vernova.
In April 2018, Mr. Lawrence Culp Jr. joined the (GE) Board and took over as CEO in October 2018. Massive debt, weaker margins, slow growth, concerns about sustainability, and 16 consecutive negative credit ratings were all problems at (GE) when Mr. Culp Jr. arrived. During this time, (GE) went through some tough times and did some important things, such as splitting NBCUniversal and Biopharma and demolishing GE Capital, which had been a shining star under Mr. Flannery's leadership. Not only that, but the Dow Jones Industrial Average (DJIA) de-indexed (GE) , which led to dividend cuts.
Mr. Culp's priorities upon becoming CEO of (GE) in 2018 were to reduce leverage, turn around the loss-making companies, and sell off non-core assets. The COVID-19 epidemic struck just as things were beginning to make sense and improve, further complicating Mr. Culp's already difficult job. Not long after that, in November 2021, he declared that General Electric's Aerospace, Healthcare, and Vernova divisions would be splitting off into their own companies. Mr. Culp also revealed intentions to eliminate the company's historic light bulb segment and sell off its shares in oil service group Baker Hughes and airplane leasing behemoth AerCap Holdings. The strategic statements also included notable changes to preferred and pension liabilities.
Driving The GE Vernova Transformation Into Positive Territory Before Spinoff
(GE) has had trouble in the power and renewable energy divisions. As a part of the 2024 Spinoff, these divisions will be merged and renamed GE Vernova. These sectors make up around 51% of (GE)'s operations after the healthcare spinoff in 2023. It is believed that the forthcoming spinoff will enhance performance and simplify company operations. Better financial reporting, operational strategy, and capital allocation will also result from this.
The responsibility of reviving and turning GE Power & Renewable's Power division into a profitable one fell to CEO Scott Strazik in 2017. Starting in 2017, he served as the head of GE's Power Services division, and in 2018, he was promoted to the position of chief executive officer of Gas Power. Not long after that, in 2021, he took the helm of the Power business, expanding his responsibility even more. The power business has been steadily improving margins and getting out of the low-growth market since then. Power did not turn a profit in 2018. But it broke even and began making operating profits after introducing reforms and cost-cutting measures.
In response to the present market circumstances, the corporation has reduced its facilities by more than $1 billion to take advantage of the halving of the worldwide large-turbine market. Considering this, Steam Power has eliminated unprofitable equipment and is now concentrating on aftermarket parts and services. Segmental profit improved from $808 million in 2018 to $1,449 million in 2023, despite a 4.3% CAGR fall in revenue from $22,150 million in 2018 to $17,731 million in 2023. A low double-digit margin is within reach for the power business by 2024.
Meanwhile, Renewables was having trouble with its offshore operations while concentrating on renewable energy. Inflationary pressure, high rates, and a dearth of robust regulatory policies made it difficult for them to execute wind orders. Because of this, they had to cancel orders that weren't profitable anymore. When it comes to sectoral trends, GE Vernova is being judicious about which offshore projects and efforts to onboard.
GE Vernova is on the cusp of transformation. The outlook seems good, coupled with key drivers such as the 10-year extension of production tax credits for wind projects under the US Inflation Reduction Act (IRA), a focus on clean energy, a proposal to expand wind installation to 150–200 GW in the next ten years, more than double from 88 GW in the past decade, and other incentives. GE Vernova will emerge as a stronger and more focused energy player in the upcoming years, thanks to the underlying demand, leadership positions, federal incentives, and Mr. Scott Strazik's proven leadership.
GE Stock Performance Transformation (2000–2010), (2010–2018) And (2018 onwards)
2000–2010: (GE) significantly underperformed over ten years, yielding a CAGR return of -6.05%. During the same period, the S&P 500 index generated a flat CAGR return of 0.49%, whereas the DJIA index generated a CAGR return of 2.53%. (GE) underperformed the S&P 500 by 6.55% and DJIA by 8.57% from 2000–2010.
2010–March 31, 2018: Over the period of 7.3 years, (GE) generated a subdued CAGR return of -0.9%. At the same time, the S&P 500 index generated a strong CAGR return of 12.97%, whereas the DJIA index generated a CAGR return of 13.36%. Again, GE underperformed the S&P 500 by 13.86% and the DJIA by 14.25% from 2010 to March 31, 2018.
April 1, 2018–January 30, 2024: Over the span of 5.8 years, (GE) generated a surprisingly positive CAGR return of 10.29%. During the same period, the S&P 500 index generated a strong CAGR return of 13.65%, whereas the DJIA index generated a CAGR return of 11.09%.
Despite (GE)'s underperformance compared to the S&P 500 by 3.37% and DJI by 0.80% from March 31, 2018, to January 30, 2024, the gap or delta has diminished when compared to the periods of 2000–2010 and 2010–March 31, 2018. This indicates a good turnaround story for GE, reflecting a rise in its performance under the leadership of Mr. Culp.
Why You Should Consider Buying GE Now
An enticing investment opportunity exists at General Electric during its current transformational period. Through strategic divestitures and spinoffs, (GE) is focusing on its core capabilities, signifying a turn towards more streamlined and efficient operations. This comes after years of difficulty caused by strategic errors and changes in the market. With the goal of achieving value unlocking and sector-focused growth, the firm has declared its intention to break into three distinct entities: aviation, healthcare, and energy. Under CEO Lawrence Culp Jr.'s leadership, (GE) has refocused its efforts to cut debt, improve operational efficiency, and spur technological innovation. Notable initiatives include (GEHC) spinoff and the impending power and renewable business separation into GE Vernova, both with the goals of enhancing financial performance and taking advantage of market opportunities.
General Electric is demonstrating advances in its power business and strategic positioning in the renewable energy market to take advantage of government subsidies and worldwide movements towards clean energy as part of its transformation, which is both structural and operational. A more concentrated leadership style, strategic use of cash, and this reorganization all put (GE) in a position where it might be an appealing investment. The current spinoffs and restructuring initiatives at (GE) could have a major influence on the company's market position and financial performance, so investors should keep a careful eye on them. Those interested in long-term value creation and market leadership in vital industries may find GE Vernova's predicted rise as a focused energy player, together with (GE)'s historical resiliency and strategic pivot, to be an appealing investment tale.
On the date of publication, Jim Osman had a position in: GE . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
