General Electric (GE) is surging 15% pre-market after the
company named H. Lawrence Culp, Jr. Chairman and Chief Executive Officer,
Mr. Culp joined the Board in April 2018. He was the CEO of Danaher (DHR) for fourteen years. During his tenure he led Danaher's transformation from an industrial manufacturer into a leading science and technology company. Danaher executed a disciplined capital allocation approach under Mr. Culp, including a series of strategic acquisitions and dispositions, a focus on investing for high-impact organic growth and margin expansion, and delivering strong free cash flow to drive long-term shareholder value. During his 14 years at the head of Danaher, the company's market capitalization and revenues grew five-fold.
Outgoing CEO John Flannery was at the helm for a little over one year. The former GE Healthcare CEO missed targets and was slow to enact change, creating doubts that an insider like him was capable of doing the heavy lifting needed to bring about a GE turnaround.
GE's stock hit new lows last week as the market anticipated the company's inability to meet EPS and free cash flow targets for 2018. In July, GE guided fiscal 2018 EPS and free cash flow to the low end of its prior ranges of $1.00-1.07/share and $6-7 bln, respectively.
This morning, GE announced it will fall short of that guidance due to weaker performance in the GE Power business, which has been the primary laggard at the industrial conglomerate. GE expects to take a non-cash goodwill impairment charge related to the GE Power business. GE Power's current goodwill balance is ~$23 bln and the goodwill impairment charge is likely to constitute substantially all of this balance, which accounts mostly for the Alstom acquisition. The company said GE's businesses other than Power are generally performing consistently with previous guidance. The company will provide additional commentary when it reports third quarter results, likely in late October.
GE investors finally have reason to be optimistic because Mr. Culp's track record at the industrial roll-up Danaher is so strong -- the stock is up over 10x since 2000.
Meanwhile, removing guidance for the year takes a big risk off the table for the stock.
In June, GE announced it will separate its healthcare business, but the company had yet to elaborate on those plans. Interestingly, much of Mr. Culp's success at Danaher was acquiring high-quality businesses in the less-cyclical healthcare sector.
Another point of focus for investors will be the company's dividend, where analysts still see risk to the 4% yield.
As of Friday's close, GE's market cap was just under $100 bln, but the enterprise value was $220 bln including $115 bln in debt. Despite the recent underperformance, GE's EV/EBITDA multiple of ~12x represented a very modest discount to other publicly traded industrial conglomerates.
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