Well, Monday, November 13, was the day that John Flannery, Chairman and Chief Executive Officer of General Electric (GE), got his chance.
As I have argued earlier, the CEO of a turnaround situation basically gets one shot, one chance in the sun, to present his or her vision of what the future might be; one chance to take command of the picture – before leading his or her organization onwards to the achievement of that vision.
Yesterday was Mr. Flannery’s day.
The performance: less than stellar. One could even say that it was a lackluster performance. The market was basically disappointed in the effort. General Electric stock closed at $19.02 but was down to $18.78 for the day from a close of $20.49 on last Friday.
Investors seemed to be saying that if the company was going to cut its quarterly dividend in half, from $0.24 per share to $0.12 per share, it should have had a more dynamic vision in mind. Besides the tepid performance of the leader, many investors argued that the leadership didn’t go far enough in its streamlining and that the plans for change were too slow.
The vision presented by Mr. Flannery: to make the company “smaller and simpler.” Wow! What a picture to leave us with. Maybe this was all that could be expected from a 30-year veteran of the company. Maybe, this is why you bring in outside blood – fresh energy – new insight. But General Electric has a reporting problem. It substantially revised its cash flow projections. The cash flow of the company was reported to be $11.6 billion in 2016 or around 2.05 per share. Earnings per share were said to be $1.49 per share.
During that year, the return on shareholders’ equity was reported to be 17.9 percent. This result places General Electric in the category of performers producing “sustainable competitive returns.” The company’s return on shareholders’ equity had averaged slightly more than 13.0 percent for the five years previous to 2016. This year, GE is now expecting the cash flow in 2017 to be around $7.0 billion, a decline of almost 40 percent. Projections for earnings per share are now placed in the $1.04 to $1.12 range.
No information was provided for the return on shareholders’ equity, but one would expect it to drop back down around the 11.0 percent to 13.0 percent range.
The point is, by industry standards, this is a pretty good performance and the drop-off is not that bad, when compared to where a lot of other companies are.
But General Electric stock is off by about 40 percent this year, let alone what happened on Monday. And, the GE stock did little or nothing during the stock market rise from the depths of the Great Recession.
What is going on here?
Given the GE performance figures, it is hard to see why the GE stock price performed so miserably during the tenure of Jeff Immelt. Yes, he can be criticized for a lot of things, but the numbers remained high, and the stock performance remained low. And, for the share price to drop by 35 percent this year before yesterday when the overall stock market was hitting new highs constantly during this time period.
Something seems to be missing in this picture. And, Mr. Flannery comes out and says that his goal is to make the company “smaller and simpler.” Then, he adds that cash flow in 2018 will be back up to the $9.0 billion to $10.0 billion ranges, while earnings per share will be just about where the projections are for this year.
This will be achieved by focusing on aviation, healthcare, and power, and these three divisions only produced 58 percent of all of the company’s revenues in 2016.
My point is that the story we are getting doesn’t quite seem to fit together. In terms of comparative standards, even with the reduction in the numbers, GE seems to be performing well relative to what many other firms are doing. There are a lot of companies that would treasure an 11.0 percent return on shareholders’ equity.
Yet, investors are not happy with this performance. Someone is seeing something more than what is being released to the public. And, why do a large number of analysts want the company downsized even further than Mr. Flannery’s plan, and they want the action to be more dramatic. Again, maybe having a 30-year veteran of the company in charge of the “turnaround” is not the right choice – outside eyes might be more productive.
Over the past five to seven years, I have been fooled by the high performance numbers of the company and by the failure of the stock market to reflect returns on shareholders’ equity that were trending to 15.0 percent. And, these returns were achieved year after year, something that is not usually achieved if the company is facing some underlying difficulties.
So, maybe Mr. Flannery is not the right person for this job. Maybe someone “from the swamp” is not the right person to take this storied company into the future. Maybe he is not the right one to reveal the disconnections between reported results and corporate dysfunctions.
I tend to stand with the market on this one. Yesterday’s performance by Mr. Flannery was disappointing. He lost his chance to really change things, and now, the hopes for a different future have dimmed.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.