Is GE Stock Dead Money? ‘Hell No,’ Says CEO Larry Culp.

It’s a radical strategy. GE needed some bold ideas, though. The company, and the stock, has struggled for what feels like a generation.

GE was the most valuable company in the S&P 500 at the end of 2003. Its peak market capitalization of $682 billion, reached in April 2000, had shrunk to less than $60 billion just weeks after Culp took over in late 2018, according to Dow Jones Market Data.

The first external CEO in the company’s history, Culp has made strides turning the company around. The breakup—the second act in the GE turnaround saga—could define his legacy there.

Barron’s sat down with Culp to talk through the turnaround and what investors can expect from the company while the spinoff process moves ahead. An edited version of the conversation follows.

Barron’s: Wasn’t the first act of the turnaround drama enough? The company is on sounder operational and financial footing. Why break it apart?

Larry Culp: You think about everything we’ve talked about over time relative to the operational changes. If the balance sheet was still in an overleveraged position…if we weren’t running the business better despite the pandemic….[Spinoffs] are merely an academic exercise. For investors, the best is yet to come.

The best way to generate value from here is to break up? Danaher , the company you ran from 2000 to 2014, did very well as a conglomerate. That approach can’t work anymore at GE?

We had a very diverse portfolio [at Danaher]. I’ve seen that model work. GE operates at a different scale. When you think about [GE] Healthcare, [it is] as large as the Danaher I left on my last day. Aviation and power are bigger than healthcare.

[Danaher’s sales totaled $19.9 billion in 2014. GE Healthcare reported sales of $19.9 billion in 2019, before the pandemic, though the total dipped to $17.9 billion over the four quarters through September.]

When you think about all we needed to do [at GE], to manage less from the center, be more focused on the business, it’s a logical extension to say, well, if you’re doing that and you’re making progress, since you don’t lack for scale, can you accelerate that with a more focused board, a management team that doesn’t have to worry about other unrelated businesses?

OK, but all the spins won’t be wrapped up until 2024. That’s a long time to wait. What about the “dead money” problem? How do you convince investors that GE stock won’t get stuck in deal purgatory?

I’ll build on your word and say, “Hell no.” For certain, investors who simply want to buy a great healthcare company or a great aviation company, they may not necessarily get in.

I think you really have to tease apart what’s happened in our stock since the announcement. Is there some deal limbo? Perhaps. But with Omicron, GE is trading in line with the sector.

OK. 

We’re going to continue to drive improvement. I think the story continues to be about our performance. Whether you’re looking at the performance trajectory of this business, or looking at the pieces, I think there’s going to be more appeal.

You talked about business acceleration. Healthcare is slated to spin off in 2023 and then GE Power in 2024. Is the two-year timeline a case of under-promise and over-deliver? Can you accelerate the timeline?

If conditions are such that we can do better, I take your point. But I think, for now, we’re gonna stick to that schedule. Teams are hard at it.

You picked up on acceleration. Just to give you a little bit of flavor, it’s been fascinating to see how people in the businesses have reacted to this announcement. I’ve seen a sharpening and a quickening in our work. That leads me to be pretty excited about what we’re going to do this year, the performance we can deliver.

Leaders are energized, but now that the spins have been announced, everyone else perks up. What is your inbound call volume like? Are businesses more interested in deal making?

{Chuckling] I’m gonna give you a bunch of names. They will call me this week.

Please do. 

We probably get some inbounds when we make an announcement like this. I think everybody does. [The announcement] wasn’t the start of inbounds as you would imagine. We’ve gotten inbounds regularly since I joined the company.

But I think we know the path that we’re on. We’ll be open-minded if somebody has got a better idea. But that said, I’m really focused on this two-step process.

But nothing is off the table? 

We have a plan of record. I think the feedback we’ve gotten both inside and outside the company has been supportive, reassuring, strongly so. I’m not one to say never, so I’m probably not one to rule anything legal, anything ethical, out categorically. If something big, something strategic, is out there, it probably happens on the other side of the spins.

Investors don’t have a problem with the business outlooks for aviation and GE healthcare. GE Power, however, is a bit of a mystery. After the dead-money question about spins, investors have the melting-ice-cube question about Power. Is fossil-fuel power generation doomed?

I think in its most simplistic form, that’s a business poised to lead in the energy transition. Now, two things have to happen. The first is we need to perform better. We need to run these businesses better than we have over the last several years. I think we have ample evidence in terms of cash flows, in terms of margin expansion in terms of service growth in gas power, that we can do this.

The other thing that we need to have happened here, if the world is serious about navigating the climate challenge and effecting an energy transition, [is leaders] embracing a role for gas, embracing a role for nuclear. We can’t [transition] strictly on the back of solar and wind.

I think people are going to understand [GE has] a lot of arrows in our quiver to help customers. Not only with their core generation capability and how the mix evolves from here, but frankly, how you make the grid work. There’s a lot more we can do in grid software, in addition to grid hardware, to help modernize the grid the world over.

These spins will, essentially, dismantle an American icon. Do you ever think about GE’s legacy as an American company?

We know GE looms large and that casts a long shadow. Because memories are long, the backward look is not uncommon. But I think, increasingly, it’s going to be a dated lens. That’ll be a good thing for everybody involved with the company.

Any advice for the leaders of the coming GE spinouts? They will have to answer to investors, and not just to you.

I think my advice is to stay hungry and stay humble. I understand the rush that comes with leading a public company. If you’ve been at an industrial career for 10 or 15 or 20 years, when you’re in that zone, you [think] you’ve arrived. You haven’t arrived. You still have to earn it every single day.

Thanks, Larry. 

Write to Al Root at [email protected]