General Electric’s (GE) incoming CEO John Flannery is set up for success. And a big reason why is because his predecessor Jeff Immelt set the bar low.
GE was looking less and less like an industrials company and more like a finance company during the early years of Immelt’s tenure as CEO. Immelt, who took the helm in 2001, learned the hard way that this was not a good move, as GE got slammed right along with Wall Street’s big banks during the 2008 financial crisis.
Since the recession that followed, GE has shifted its business away from the financial sector to once again become a more focused industrial company. Analysts say this shift has been under-appreciated and marks a good setup for Flannery. They say the company’s exposure to cyclical industries like large infrastructure and aerospace equipment should prove lucrative in what seems to be the late stages of the economic recovery.
Source: Barclays research, company data
Acquiring core businesses and selling off non-core businesses
The company spun out Synchrony Financial, its private label credit card business, for $21 billion in 2015. This was just part of the $260 billion in GE Capital divestitures that Immelt oversaw. By next summer, the financing business will include only “captive finance” such as aircraft, power project and health care equipment leasing.
In addition to shedding most of its financials business, the company has also shed other non-core units. In 2009, it sold GE Security to United Technologies (UTX) for $1.8 billion. In 2013, it sold NBC Universal to Comcast (CMCSA) for $18 billion. In 2016, it sold GE Appliances to Haier for $5.8 billion. And more recently, it sold its water and process technologies business to Suez for $3.4 billion in 2017.
“The end of the traditional industrial conglomerates is nearing,” according to Barclays’ Scott Davis. “Complexity kills creativity, complexity embraces bureaucracy, complexity is not something that investors want. Investors want to be able to isolate the risk in their portfolio down to tangible things. They don’t see the advantage of owning a company that’s in so many different sectors.”
Meanwhile, the company has embarked on major industrial acquisitions that position it for late-cycle growth. It bought Alstom in 2014 for $9.5 billion and Baker Hughes in 2016 for $25.2 billion, again focusing the portfolio.
Flannery is set up for success
Flannery, who will take over as CEO on August 1 and most recently ran GE Healthcare, is expected to be more aggressive in transforming the company going forward. Potential changes could include a spin-out of health care and the shuttering of some ancillary businesses, according to Barclays.
A GE “lifer,” Flannery spent most of his time at GE Capital and in corporate roles, including as head of M&A, as shown in the graphic below.
Source: Barclays research, company data
While GE’s operations are better-positioned than they were a few years ago, investor sentiment has yet to improve.
During Immelt’s tenure, the stock has significantly underperformed the market, rising only 11% versus the market, which surged 114%. Those numbers look especially paltry when compared to the 4,000% return under his predecessor Jack Welch, who was CEO from 1981 to 2001.
“Quite frankly, GE just needs a new messenger,” Davis had written before Monday’s announcement. “Investors had lost complete faith … Jeff Immelt has not put up the numbers.”
Expectations are always high for any incoming CEO. Fortunately for Flannery, GE’s operational structure is much cleaner than it was, and the bar for stock returns have been set very low.
Nicole Sinclair is markets correspondent at Yahoo Finance.