General Electric (GE) is an insanely complicated company to understand — it’s no longer a simple industrial giant selling light bulbs and dishwashers. But the reason why investors are still down on GE’s stock — despite a fresh round of cost cuts revealed this week — is rather straightforward.
Investors aren’t seeing any benefit yet from a year’s worth of operational reshuffling by GE CEO Larry Culp. In effect, all Culp has done thus far is try to mop up the many messes of his predecessors at GE and set the stage for a potentially (though highly uncertain) better free cash flow stream in 2020.
Those are certainly admiral achievements by Culp given the deck of cards he was handed, but not enough to truly excite the majority equity investors. And that logic is on full display this week.
The struggling GE said Monday it would freeze the pensions of 20,000 U.S. salaried workers, a measure aimed at lowering its pension deficit and cutting debt. GE’s move is expected to cut its pension deficit by about $8 billion and lower debt by up to $6 billion.
GE’s stock initially popped on the news, but closed down slightly on Monday’s session. The stock fell 3% on Tuesday, bringing its one-year decline under Culp to roughly 36% according to Yahoo Finance Premium data.
Stuck in a turnaround
Culp’s latest move comes as he visits factories to fine tune how GE operates (with an eye to cost containment), rounds the corner on selling off GE’s biopharma business for $21.4 billion to former employer Danaher and restructures corporate staffing levels. Some high-profile GE investors have applauded his efforts.
Even still, recent commentary from Culp suggests third and fourth quarter earnings results will continue to show a corporate giant stuck in major turnaround mode. Culp has said 2019 is a “reset year” and it has been just that. But that doesn’t make it any easier of a pill for investors to swallow.
Meanwhile, not everyone on the Street is sold that the pension freeze is game-changing news for the bottom line.
“Bears argue that cash from divestitures is not being directed to benefit equity holders. Instead, GE is boosting long-term care insurance reserves ($5 billion so far, $9 billion to go), repaying debt ($5 billion tender in October), and shoring up pension plans ($4 billion to $6 billion after-tax use of cash announced Tuesday). Management has also mentioned repaying intra-company loans to GE Capital,” wrote Bank of America Merrill Lynch analyst Andrew Obin after the pension freeze news.
Obin’s sentiment on GE was shared elsewhere on the Street.
“We do not perceive this morning's announcement as incrementally positive, considering that now an additional $5 billion-8 billion of asset sale proceeds has to be channeled toward the pension (versus, for example, when GE presented its overall debt reduction target during its March 14 Investor Outlook meeting). During that meeting, pension had not been a formal focus point for deleveraging actions, but has since become so due to declining interest rates,” said veteran GE analyst John Inch at Gordon Haskett.
Wolfe Research analyst Nigel Coe was a bit more upbeat. “This is clearly good news to the extent that GE is managing its liability tail in a more creative way, and theoretically this path remains open going forward. … This is an important reminder that any residual concerns around balance sheet liquidity and distress are over-stated.”
The next test for GE’s stock: Oct. 30 earnings day.