And why investors are feeling optimistic
SMITH BRAIN TRUST – Analysts may disagree on General Electric stock prospects, but there’s one thing they do seem to agree on: the effectiveness of CEO Larry Culp.
Culp took over as chief executive in October 2018, following a long and bumpy ride for the multinational conglomerate.
GE’s stock has been on a bit of an uptick of late, recently hitting a 52-week high above $12 a share. It’s a relatively new sensation for shareholders – GE shares had been under pressure for much of the past five years. In 2016, the price dropped by roughly half.
“There is optimism among investors that GE’s fourth quarter report – to be issued on Jan. 29 – will show evidence of an improvement in corporate performance with revenues and earnings exceeding most analysts’ expectations,” says Kass, a clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business. Culp was lead director of GE before being promoted to CEO. Prior to that, Kass notes, he had “a stellar record of building and managing Danaher Corp.,” a Washington, D.C., based conglomerate.
Paulo Prochno, clinical professor of management and assistant dean of Maryland Smith’s Part-Time and Online MBA programs, also spoke with InvestorPlace, offering up a broader view of GE and its history as a “very diversified” conglomerate. “The strategy literature suggests that unrelated diversification results in lower-than-average performance – unless the company has unique capabilities that it can transfer to each unit,” he said.
“The ‘old’ GE was very successful due to its managerial capabilities. For a long time those capabilities were rare, and although there was not much synergy across units, every unit benefited from those managerial capabilities developed at the headquarters level.”
Not surprisingly in competitive landscapes, competitors over time developed managerial capabilities as effective as that of GE, which subsequently rethought its diversification. “Some business units were sold, and GE started to look for operational synergies across units,” Prochno said. “What was once a conglomerate became a more focused company, with businesses around a core of industrial engineering.”
But GE “appeared to lose its soul” in this transition, Prochno added. “It was hard to find a new core for the company, and some businesses suffered. It became difficult to answer the usual question one should ask all diversified companies: what is keeping the different units together?”
“Coming from Danaher, a highly diversified company that resembled the old GE, he is bringing back a core for GE,” Prochno said. “Not exactly the same core as GE in the past, but one that is general enough to be applied to all business areas within the group: operational efficiency. Danaher was able to develop and keep a system based on operational efficiency that has added a lot of value to their areas; GE seems to be heading in that direction.”
Culp is acting on multiple fronts, “including adjustments in the portfolio of businesses – but his major contribution so far is to bring back a glue to keep the units together,” Prochno added. “This is still under development, but investors have been optimistic with the future potential of this logic.”
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