Can General Electric return to the Dow 30?

The late 19th century was one of great progress in the area of innovation. Inventors such as Nikolas Tesla and Thomas Edison, found ways to harness a remarkable force of nature through some seemingly simple inventions — the lightbulb of course, being the most famous of all. While Tesla was a dreamer whose only focus was innovation, Edison, his unofficial rival, was a shrewd businessman and in 1892, the Edison General Electric Company merged with the Thomson-Houston Electric Company to form the world famous General Electric.

Since 1907 GE was part of the Dow 30, where membership meant being one of the biggest companies in the world. And it was in that club for over a century — a testament to its influence and staying power.

However, all that began to unravel during the last great financial crisis in 2008 and in 2009, GE’s stock had plunged more than 35 per cent. The tremors of its fall rippled across the world and so in stepped the US federal government and famous investor Warren Buffet to revive it with a bail out of over $136 billion. Staggering the sum was but despite the smelling salts of all that taxpayers money, stagger was what GE continued to do for close to a decade.

By June 2018, GEs market value had plummeted to about half of what it was just two years earlier. While GE was still considered one of the world’s major companies, it’s prestigious spot in the Dow 30, one that it had held for over a hundred years amongst the global elite, had been lost. That begged the question: what went wrong?

Let us look away for a moment and briefly examine another company that had slowed considerably about a quarter of a century ago but in the years that followed, became the world’s first to reach a trillion dollars in value.

We are all familiar with Apple. But those who really know it’s history will point to the return of Steve Jobs as being the major turning point in its history and being without a doubt, the deciding factor in making the company the trailblazer for communication technology. But just prior to Jobs’ legendary return, Apple was in a bit of a rot. Following his sacking Apple diversified and till the mid 90s was producing a whole range of products aside from computers. With their hands in so many jars, Apples computers began to lag behind its competitors in relevance, usability and overall quality,

It therefore came as no surprise that Jobs’ first order of business upon his return was to scale down their product line and switch the focus back to making top notch computers.

The result of that was and endless line of iconic products such as the IMacs, Ipods and the one that truly changed the game: the IPhone. It’s not to say that strategy was the sole factor in Apple’s revival but it played a major part in getting it back on track.

GE’s journey has been similar to Apple’s phase before Jobs’ return. It’s portfolio at the end of 2017 consisted of eight separate segments including:

Power, Aviation, Healthcare, Renewable Energy, GE Capital, Oil and Gas, Transportation and Lighting.

Of the above, Power was the largest and the one that registered the biggest losses leading up to June 2018. GE’s fallout from the Dow 30, was attributed mainly to how badly the Power segment had done and much of the blame was thrown at their former CEO, Jeff Immelt. His successor, like Jobs, laid down a plan at the end of 2017, for GE to downsize and focus on three of the eight segments. Power, Aviation and Renewable Energy (Green Electric).

Since it’s plans for downsizing, there have been some positive signs for GE. At the beginning of 2019, it’s stock bounced back and steadily climbed for more than 8 weeks fuelling talk of a turnaround. In the areas of power and renewables the expectation is that GE will attain a positive cash flow by 2021.

It’s aviation segment has been expected to register growth despite recent blips attributed to aviation disasters involving Boeings 737 MAXs — to whom GE supplies engines.

So as far as GE’s status as a highly diversified conglomerate goes, it will soon be over. Various Divisions such as Lighting and Trains are being phased out while GE Healthcare will now be run as a separate company. To further eradicate debt, GE has also sold off it’s biopharma business along with stakes other key ventures.

At the time of this writing, GE’s stock is at $$9.12 per share. This still sits above the price target of $5 set by JP Morgan analyst Steve Tusa. Tusa, who had predicted GE’s stock plunge more than two years ago, remains sceptical of GE’s ability to overcome issues pertaining to weak cash flow and high pension liabilities.

That hasn’t stopped GE’s current CEO, Larry Culp from remaining optimistic and he anticipates the company to have a positive cash flow within the next two years.

Whether or not downsizing will play a major part in the revival of GE, remains to be seen. However it seems like the sensible thing to do at a time when deleveraging is going to be key to getting GE’s engines back to full throttle.

The giant did slip, but with a more focused and sustainable approach, could it once again be welcomed back in the Dow 30 club where it was once so celebrated? The next few years will tell.