Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

GE investors aren't the only ones growing increasingly irritable.

CEO Jeff Immelt was the grand finale at this week's Electrical Products Group conference, an annual Florida gathering of industrial CEOs, and his presentation on Wednesday, which turned salty at times, came off as defensive. 

Asked whether cranky investors should just accept that General Electric Co.'s businesses are what they are, Immelt joked that he was in Fox News mode: "We report, you decide." Unfortunately for him, what some investors decided to do during his presentation was jump ship.

What Was That?
Investors were underwhelmed by Immelt's presentation. Rivals Honeywell and United Technologies were essentially flat on Tuesday after giving their presentations.
Source: Bloomberg

Immelt had a reason to be testy. His job security has been cast in doubt after activist investor Trian Fund Management ramped up the pressure for cost cuts and better earnings, and a big cash-flow disappointment in the first quarter swelled the ranks of GE critics.

The Case of the Vanishing $2
Analysts have grown increasingly skeptical of GE's ability to hit its EPS target. Activist investor Trian, on the other hand, thinks it can earn as much as $2.33 in 2018.
Source: Bloomberg

There were some nods to shareholders' complaints. The $240 billion maker of everything from jet engines to locomotives and industrial software further broke down how it calculates free cash flow to be more transparent about the puts and takes and to align its numbers better with analysts' thought process.  But while some had expected Immelt to finally walk back a $2 earnings-per-share target for 2018 that many analysts have concluded is impossible after the rout in commodity markets, he stubbornly stuck by it.

Immelt put resources markets in his "still challenging" column and acknowledged that without an improvement there, that $2 number would be at the ambitious high end. But he said options to curtail GE's spending on digital investments provided a path to achieve it. OK, sure, but resources markets were challenged in December when GE held its 2017 outlook meeting and again affirmed the $2 target. They were also challenged in April, when GE reported first-quarter earnings, and there was no talk of the "high end" then.

Falling Short
GE's valuation has dropped toward the bottom of the heap among a basket of industrial companies
Source: Bloomberg

That Immelt would entertain dialing back digital spending is a bit surprising; turning GE into a top 10 software company, anchored by its Predix operating platform, has been one of the bigger pushes of his transformation efforts. To be fair, he has already spent a lot on digital; Immelt quipped on Wednesday that if the attendees were to count up everything the other conference presenters had spent on digital and multiply it by two, GE would still be out in front. But even as the company slashed expenses elsewhere and investors worried about whether all this digital investment was really worth it, there hadn't been much talk of cuts. 

Now, GE says it's had a number of offers from potential financing partners. It also expects its digital business to generate more meaningful revenue next year, which will help offset the cost. That should be good news for investors, helping to alleviate some of their cash concerns and allowing them to better appreciate a business that at the very least has the potential to make GE much more profitable, if not generate meaningful additional revenue. But whoever those financing partners are will theoretically be able to share in the payoffs. And you have to wonder whether these are adjustments that would have been made anyway or whether it's all part of a push to get to $2 by whatever means necessary.

Immelt's frustration with the obsession over that number was palpable. At one point, he said of GE's business: "It's not crap. It's pretty good really." There were some expletives, and if I had a dollar for every time Immelt mentioned the company's 2017 organic growth target -- an aggressive outlook that's actually proving to be in reach after a strong first-quarter showing -- I could maybe afford one $28 GE share. And I don't blame him. That organic growth was impressive. Immelt truly has done a lot to try to remodel the business, and a big part of the cash issue has to do with accounting practices for long-term service agreements, which are typically hugely profitable. 

Not So Crazy After All
GE's revenue growth excluding the impact of M&A and currency swings was impressive in the first quarter. But shareholders were more focused on the disappointing cash numbers.
Source: Bloomberg
Data for GE's organic target reflects the midpoint of the range.

But the defiance in the face of criticism came off as a bit arrogant, and that's not what shareholders are looking for. Ford Motor Co. gave now ex-CEO Mark Fields a lot less time to try to turn things around. I'm not convinced that a new CEO would magically solve all of GE's problems. He or she might in fact just end up reaping the rewards of all Immelt's hard work. But Immelt isn't the only one growing impatient. 

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

  1. The added line on the capitalization of its software endeavors was particularly helpful and may help investors better come to terms with how an old-school company transitions into a digital age.

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

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net