Early Exit?

Jeff Immelt's Trian Times

The GE CEO's record isn't perfect, but he deserves the chance to complete the transformation he began.
At Closing, April 25th
14.05 USD

Well, that'll ruin your Friday afternoon.

General Electric Co. shares jumped as much as 2.6 percent amid reports that activist investor Nelson Peltz's disappointment with CEO Jeff Immelt's performance could lead to an early retirement. Fox Business cited missed earnings targets and an underwhelming share performance as the reason for Peltz's displeasure.

Great Expectations

GE had to decrease its revenue outlook throughout the year. Organic growth ended up being flat for 2016, excluding the impact of the Alstom acquisition.

Source: Bloomberg

Data reflects the midpoint of the guidance range.

Peltz's Trian Fund Management told the news outlet that it's working "constructively" with the company. Still, the last thing you want as a CEO is for shareholders to be applauding your potential departure with the biggest intraday gain in four months. 

It's not the first time early retirement rumors have haunted Immelt. Barclays Plc analyst Scott Davis speculated almost two years ago to the day that Immelt may step down because investors were ready for a change. That talk faded as the next month Immelt announced the company would largely retreat from finance and dismantle its sprawling GE Capital business by shedding $200 billion of assets. Trian took a stake in GE amid this massive breakup and essentially called on Immelt to keep doing what he was doing.

The suggestion that Trian would be aggressively critical of Immelt now is a bit interesting. GE has largely followed through on much of what Peltz asked for, including improving margins, demonstrating a willingness to pursue a more efficient capital structure, returning cash to shareholders via buybacks and making smarter deals.

The company in December committed to an additional $1 billion in cost cuts as it seeks a 16.5 percent-plus industrial operating margin by 2018. GE has cited $20 billion in potential debt capacity -- the same figure as Peltz -- as a component of its capital-allocation strategy. That and other cash sources will help fund, among other things, $8 billion in incremental buybacks, bringing total repurchases for 2015 to 2018 to as much as $63 billion. GE has $10 billion in unallocated capital, which could add 8 cents a share to its 2018 EPS if it's spent on buybacks, estimates RBC analyst Deane Dray.

As far as deals go, Immelt seems to have gotten the message that investors aren't fans of expensive purchases that don't work out as planned. The $10.6 billion acquisition of Alstom SA's power assets completed in 2015 was replete with risks, not least of all because it was one of the largest industrial acquisitions ever undertaken in GE's history, but it's looking more and more like a victory. At a meeting with analysts this week to discuss the company's power and renewable energy businesses, CFO Jeff Bornstein said GE had wrung $1.5 billion of synergies from the Alstom assets in the first year, putting it ahead of schedule to reach its upsized target of $3 billion by year five.

Victory Lap

GE was able to boost the low end of its estimates for 2018 earnings accretion from Alstom after getting more comfortable with its synergy targets and finding revenue benefits

Source: Bloomberg

The 5 cents of Alstom-related accretion in 2016 excludes currency effects. Data reflects the midpoint of estimates when ranges were given.

Immelt's two 3D-printing takeovers last year weren't cheap, but the potential for $1 billion in sales by 2020 and as much as $5 billion in productivity improvements over time means these deals pay for themselves. Arguably, additive manufacturing could wind up being a bigger driver of profitability and revenue growth for GE than its nascent digital industrial platform Predix. Meanwhile, the pending combination of GE's energy business with Baker Hughes Inc. was a creative way to fill the holes in its portfolio while opening the door to a possible value-creating breakup down the road.

Has Immelt made some mistakes? Of course. Botched, overly optimistic messaging on financial targets seems to be a particular problem of late. But he deserves a significant amount of credit for simplifying GE and taking the first steps in what has now blossomed into a full-on stampede into digital investments among industrial companies. Unfortunately, he hasn't been getting much appreciation from investors. GE's shares have floundered; before Friday's pop, the stock's gains in the wake of its GE Capital exit announcement were essentially in line with the broader industrial sector. Not bad, but not great either.

Nothing Special

GE has essentially performed in line with the broader industrial sector after announcing its massive break-up, suggesting more change may be needed

Source: Bloomberg

The irony is, when Peltz announced his involvement in GE in 2015, he pretty much regurgitated Immelt's own plan and yet was able to get the stock moving in a way that the CEO couldn't. The same seems to be true today. Perhaps investors need to hear the message from another CEO before they finally embrace it. That's not fair, but Friday's gains are telling Immelt something.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Brooke Sutherland in New York at bsutherland7@bloomberg.net

    To contact the editor responsible for this story:
    Beth Williams at bewilliams@bloomberg.net

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