General Electric's (GE) CFO Jamie Miller presented at two conferences Wednesday in the greater Miami area. It was the rarest of February days in which the weather was only "a little" nicer in Miami than at GE's base in Boston, but the situation at GE is so dire that there is no time in a speech for pleasantries or comments about sunny days. A concise, clearly-defined plan is needed.
As a value investor I am a fan of turnaround stories, and GE is so badly in need of a turnaround that I have read some articles in the financial media advising purchase of GE stock in hopes of a reversion to mean.
I'm sorry, it does not work that way. "Things can only get better" are five very expensive words on Wall Street, especially for investors who believe in measuring the relative performance of their portfolios.
I will focus this column on what I wanted to hear from Jamie Miller and my next one on the answers (or lack thereof) to the following burning issues facing GE and its shareholders.
A Plan to fix GE Power
Yes, a turnaround plan. No fairy tales about possible divestitures or corporate combinations, but an actual Jack Welch-style plan to right-size costs at Power until the current "pause" in orders for turbines (especially gas-powered but also wind-powered) eases. Also, it would be comforting to hear a clearly articulated explanation for the causes of the pause, and a defined date at which orders would return to normal.
This is predicated on the fact that the market for the massive turbines that GE produces is not in some kind of secular decline. I don't think that's the case, but if it is, GE's Power business is even more "non-sellable" than the market thinks.
The only executive foolish enough to buy a large-scale turbine business in a down market is former CEO Jeff Immelt, who made exactly that mistake with GE's deal to purchase assets from Alstom in 2015. Thankfully, Immelt is gone, in my view.
That brings up a very important second "must hear:" the culture at GE has changed and these are the reasons why. Ms. Miller has "only" been at GE since 2008, and has held senior positions at other companies, but that is not the case for most of GE's top executives.
The GE Way was always to run different business units and grow through the company's vaunted culture of internal promotion. But that begs the obvious question: from whom will the turnaround ideas come? Executives who have spent their professional career with only organization -- an organization that has lost over $100 billion in market value in three years?
From GE's executive bio page (with the year hired at GE in parentheses):
John Flannery CEO -- 1980
Russell Stokes CEO GE Power -- 1997
David Joyce CEO GE Aviation -- 1980
Kieran Murphy CEO GE Healthcare -- 2008
Daniel Janki SVP Bus. Transformation -- 1992
I have never met Mr. Janki, so I don't want to make any personal judgments, but I find it astounding that GE's head of "transformation" has been with the company for 26 years. Am I the only one who thinks that might engender a bias toward conservatism and affirmation of past strategies and bias against real transformation?
Cash, Cash, Cash
Jamie Miller is not a GE lifer, but she did run a business unit (albeit a troubled one in GE Transportation) so she has been trained in GE's chief corporate metric of CFOA (cash flow from operating activities.) I've met many ex-GE managers and they all rely on that metric to calibrate business performance.
At the corporate level GE has gone from a cash generator to a cash burner in the past two years, and that, more than any other factor, has destroyed value for GE shareholders.
GE's lack of cash generation drove the Board to cut GE's quarterly dividend in half to $0.12 and I believe it would have been more prudent to omit the dividend entirely. For the past few years GE Capital had been a steady source of cash for the industrial parent via tax-free dividends, but CEO Flannery made it clear in his January announcement that that gravy train is no longer available.
So, again, I don't want to hear about strategic transformations and corporate reconfigurations, I want to hear that this company is once again going to be generating more cash than it spends to replenish capital. When and how much are obviously the two key follow-up questions on the cash issue.