GE Aerospace (GE)

[JPetroInc]

GE's Larry Culp Is The Man (For The Job)

WG Investment Research - May 5, 2019 3:52 PM ET

https://seekingalpha.com/article/4260284-general-electric-larry-culp-man-job

Summary

•General Electric reported strong Q1 2019 results that beat the consensus bottom-line estimate.

•The stock is up big since General Electric reported Q1 2019 results, but GE shares are still down almost 30% over the last year.

•I am long General Electric and I have no plans to sell anytime soon.

• This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Start your free trial today »

General Electric's (GE) stock is up over 5% since the company reported better-than-expected Q1 2019 earnings. However, the recent stock performance is nothing to brag about because GE shares are still down by almost 30% over the last year.

I have been asked a lot lately about what I plan to do with my GE shares and my answer has been consistent - i.e., I plan to stay long (and wrong, at least for now). My thoughts on this company/stock have not changed, but it's important to remember, it is not going to be an easy task for GE's newish CEO, Mr. Larry Culp, to orchestrate a turnaround of this large, complex company. However, so far, so good.

A Look At The Quarter

On April 30, 2019, GE reported adjusted Q1 2019 EPS of $0.14 (beat by $0.05) on revenue of $27.3B (in line with estimates). Considering the operating environment and the company's current state, I believe that there was a lot to like about GE's Q1 2019 results.

Aviation, Healthcare and O&G were the real standpoints from a revenue and profit perspective. But, of course, Power was again a drag on the consolidated quarterly results. However, the Power unit actually showed some positive signs of a recovery (i.e., strong order numbers), even if they were only baby steps. I previously described Power as being a multi-year turnaround story and the Q1 2019 results did nothing to change my mind.

Overall, the company reported strong fundamentals for its industrial businesses and, more importantly, management still believes in the long-term prospects of these business units.

From a liquidity and leverage standpoint, GE's results were something to write home about.

Source: Q1 2019 Earnings Presentation

Management previously disclosed a goal for the company to rely less on short-term funding and they did just that over the first three months of 2019 (this type of funding declined from $17B in Q1 2018 to around $4B in the period just ended). The company also continued to reduce its reliance on GE Capital and, as shown, GE finished the quarter with a slight increase in cash (the Wabtec (NYSE:WAB) transaction came into play) and $35B in available liquidity.

I believe that management showed that this company has the ability to achieve their long-term de-leveraging plan, but they did mention that more work needs to be done. I agree. Cash/leverage/liquidity is what really matters to investors, in my opinion, and this will likely be the case for at least the next 1.5 years. It was, however, a good start to the new fiscal year.

GE's Q1 2019 results were not perfect by any means, but, if you ask me, the biggest takeaway is that it appears that GE finally found the guy that has the potential to properly manage this once "unmanageable" conglomerate.

What Mr. Culp has been able to do in such a short period of time is no small feat, at least in my mind. The guy took over a company that lacked direction and now investors actually have something to hang their hats on, i.e., a realistic long-term strategy with proven results.

To this point, Mr. Culp has:
•Agreed to sell a small (but meaningful) portion of GE Healthcare for over $20B.
•Sold the Transportation assets to Wabtec and re-negotiated the contract terms to benefit GE from a flexibility/cash standpoint.
•Settled with the DOJ (which was a huge overhang).
•Made significant changes to the board that has the potential to have a lasting impact on this once storied company.
•Announced plans to restructure the struggling Power unit.
•And most importantly, started laying the foundation that was needed to win over the market.

And the list goes on. Additionally, it is important to note that management confirmed their full-year guidance and still believes that 2019 should be viewed as a "reset year".

Source: Q1 2019 Earnings Presentation

Re-confirming the 2019 guidance may not seem like such an impressive feat, but, in my mind, this is another step forward for the new management team. Remember, the company's previous management teams were notorious talkers that almost always ended up lowering their expectations after first guiding for strong fiscal years. Yes, Mr. Culp and team will still need to deliver, but it just feels different - whether we like it or not, investing is more of an art than science.

Simply put, Mr. Culp already appears to be the right person for the gig. GE won big when the board was able to get someone with Mr. Culp's background to come in and shake up this stodgy conglomerate. Work still needs to be done, but I believe that GE has finally found the right man for the job.

GE's stock is trading at a discount when compared to its peer group.

However, investors definitely need to ask themselves two key questions: (1) what is already baked into the stock, and (2) whether or not the stock is a buy at today's price? To me, it all depends on your investment time horizon. If you are willing (and able) to hold onto the stock for the next three-to-five years, I would tell you that GE shares are attractively valued, even at current levels. However, I would not put short-term money to work in a company that will likely still face significant headwinds over at least the next 12-18 months.

Risks

A GE bear that has been right for years, Mr. Stephen Tusa of JPMorgan, is sticking with his negative call on the stock even after the company's strong Q1 2019 results. Headline risk is a key driver for the stock, at least for the time being, so GE shares will likely remain under pressure as long as Mr. Tusa stays negative (and releases his bearish notes).

However, I do believe that analysts cannot stay right forever so I would pay close attention to Mr. Tusa's upcoming investor notes (rest assured, the Tusa bearish notes on GE will definitely be coming). If Mr. Tusa and team fail to tell a convincing bearish story, which I believe has been the case for the last few months, the Tusa-put may slowly become a thing of the past.

Bottom Line

There was a lot to like about GE's Q1 2019 results and, in my opinion, the best is yet to come. I tend to agree with management in that a reset year is needed before this company is able to truly turn the corner. Moreover, I also agree with management in that GE is likely a 2020/2021 play.

Most importantly, Mr. Larry Culp has, in my mind, done a tremendous job leading GE since taking over as CEO. He has greatly improved investor sentiment and has laid out a plan for what GE may look like in a year or two. Mr. Culp definitely seems like the right guy for the job. As such, I believe that investors should treat any significant pullbacks, especially if they are caused by broader market concerns, as long-term buying opportunities.