Article written by Callum Lo, Integer Investment analyst.
General Electric (GE) officially has a new Chief Executive Officer, with John Flannery taking over the post in recent days. He succeeds Jeff Immelt, who has steered the company for the past 16 years. The change comes at a time when the firm has been somewhat failing in its attempts to create value that translates into confidence from investors. The stock price currently sits at around $ 26, down from highs of over $ 32 during 2016. Just this year, the shares are down nearly 20 percent. This represents one of the largest drops on the Dow Jones Industrial Average for the current year and has had many in the markets justifiably worried. Shareholders are looking for a substantial injection of new perspective and a leadership style that will take the firm in a different direction to where it has been heading recently. This article examines Flannery’s role in this vision, comparing and contrasting him to Immelt and speculating on what to expect from the new leader.
We’ve written a number of different pieces of analysis on General Electric in the past few months, analysing the bumpy road the firm has been taking as it attempts to take a new direction. The first of those articles established how key global oil demand and volume are to GE’s core profitability. In particular, it analysed how GE’s clientele are negatively affected by low oil prices and explored the company’s diversification into areas like renewable energy. The second analysis was concerned with GE’s flagship project Predix, which attempts to create a cloud-based platform for big data analysis and optimisation applications for industrial machinery. The third article specifically looked at the Baker Hughes (NYSE:BHGE) merger that was still up in the air at that point in time and concluded that a successful deal was likely. This article looks at Flannery’s leadership.
Flannery (left) with Jeff Immelt:
John Flannery is no outsider to General Electric, having been at the firm for around three decades, including high-level leadership and executive positions. Most recently, he worked in the key role of leading the giant’s healthcare business GE Healthcare, a division with annual revenue of over $ 18 billion. Flannery’s time here is widely considered a success, having turned around a problematic division for the company and emphasized innovation and research to create new value in the healthcare sector. Investors are hoping he will bring the same philosophy and skill set to GE’s general management and achieve the same results. The early signs are promising: Flannery has reportedly met with hundreds of different investors and says that he had heard all of them “loud and clear,” with regards to gripes they had with the current management.
Flannery first started at the corporate giant working in the GE Capital division, which has since been largely divested from by his predecessor. His role was to be a dealmaker, buying and selling substantial financial assets and portfolios. He gained a reputation as a skilled negotiator and as having an eye for bets that were not worth pursuing. He later went on to be the leading figure in the acquisition of Alstom’s power and grid divisions for $ 17 billion.
He then worked for several years overseas before becoming a part of the core leadership team in 2013, with a focus on M&A. During his tenure at GE Healthcare, revenue rose to over $ 18 billion in 2016, having dropped substantially over the course of the decade. Flannery is personally invested in GE, holding over 600,000 shares worth over $ 15 million, having increased his holding by nearly $ 3 million a few days ago.
Immelt and Flannery discussed the leadership changes recently:
In his most recent internal letter, the new CEO has described his focus as being on three key areas: Customers, team, and execution/accountability. In line with this, he plans a significant review of the huge patchwork of different business and divisions that make up GE to ensure they are performing well. He is then expected to formulate and release new strategies in November to address problems that are currently bedeviling the firm.
GE is set to continue its current shift from a simply industrial giant producing electronics and manufacturing equipment to a more vertically integrated business with products in technology, data analysis, communications, and optimisation. Given this trajectory, what specifically can we expect from the new CEO?
GE has recently focused on becoming more tech-focused, with products like its “digital twins”:
1. Don’t expect rapid changes
General Electric is a behemoth, with over 325,000 employees worldwide, operations in over 100 countries, and deeply ingrained presences in established industries. Overall, GE is the fourteenth largest company in the world. Jeff Immelt spent over a decade in the process of beginning to redirect the ship. Flannery, having been part of the core leadership team over the past few years, has been close to this transformation, and recognises its importance. He will neither reverse this strategy nor radically alter it. Instead, his focus is on turning the changes into flows of cash, ensuring the company is run well and satisfying investors. Comments by Flannery indicate a particular focus on innovation: “[Shareholders] expect more accountability internally and externally and asked that we find a way to simplify our metrics. I heard them loud and clear.”
2. Expect some restructuring of the oil and gas divisions
In our analysis on the merger with Baker Hughes, we correctly predicted that a successful deal was highly likely. This forms part of a broader strategy by GE to diversify its interests in oil and gas and integrate vertically. As such, Flannery is likely to make changes to the structure of this sector in order to remove redundancies and take advantage of the opportunities presented by the merger. GE is more likely to have a greater focus on the oil and gas industry in general, specifically in North America. The company is betting on a recovery in oil prices, so expect to see further investment in oilfield services. This assumption is confirmed by Flannery’s comments regarding the upcoming review, downplaying the need for substantial portfolio alterations and saying “We’re not starting from a weak position at all.”
Baker Hughes is an oilfield services giant:
3. Expect a focus on in-house innovation
This is part of what Flannery became known for during his time at the head of GE Healthcare. Technologies such as core imaging, digital platforms, and cell therapy systems are among the strong pushes made at the division under his leadership. This was alongside structural and financial innovations, such as Sustainable Healthcare Solutions, which was aimed at providing access for technologies in healthcare to providers within emerging markets.
Now that GE’s price has dropped to less than $ 25, its lowest price in nearly two years, it’s beginning to look like it’s within the range that investors may want to consider purchasing it if they believe there is underlying value there. We expect that the company will continue to reform and will achieve some success in terms of profitability, but don’t expect any major changes as a result of new leadership.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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