Summary Investment Thesis
To call the sentiment around General Electric (NYSE:GE) stock negative would be a gross understatement. A brief recap of the past several months explains the sour attitude toward the shares:
- A reinsurance business that has not written a new policy in more than a decade and that most investors barely knew existed is now required to contribute $15B over the next seven years to bolster reserves for its long-term care liabilities.
- The insurance debacle by itself forced the company to slash its dividend, which was cut 50%.
- The former long-time CEO and CFO were pushed out and basically disowned by their successors for their management practices.
- The company's second largest segment, GE Power, has seen its profits crater, stoking fears that solar photovoltaic power is going to make the gas turbine market far smaller.
That's a lot for investors to stomach, particularly those that relied upon a steady dividend. But we contend that the response of GE's new management and the sell-side analyst community have made matters worse. GE's new CEO has disavowed himself of his predecessor in a way that we've rarely seen at companies of this size. Yes, mistakes were made, but John Flannery is fooling himself if he thinks his added rigor will cure all ills with running a conglomerate that touches so many parts of the global industrial economy. It appears that he was given this new role because of improved results at GE Healthcare, a unit that he led for less than 3 years.
