General Electric’s stock is finally trading in the triple digits.
Has relief arrived for beleaguered investors who’ve been holding on for the roller coaster ride of the century?
Sorry, shareholders. That ride isn’t over yet.
Yes, the long-awaited turnaround at GE is starting to take shape, with the latest evidence showing up in quarterly earnings last week that beat Wall Street’s expectations.
But that’s not why the price of GE’s stock rose from $13 on Friday to more than $100 on Monday. In reality, the actual value of the company barely changed at all. Its market capitalization remains at around $110 billion, or roughly where it stood when chief executive Larry Culp took over in October 2018 with a mandate to clean up the Boston-based company’s finances and improve its long-flagging stock price.
Since then, Culp has reduced GE’s debt, improved its manufacturing workflow and changed the corporate culture. All of that takes time.
What Culp did here to lift the stock price is something different: He engineered a 1-for-8 reverse stock split, a move he announced in March and which shareholders approved in May. This procedure took effect after the market closed on Friday, combining every eight shares of GE common stock into one share, and causing the price to increase proportionately.
Reverse stock splits are rare for a company of GE’s size. They are typically deployed by struggling small companies, hoping to avoid getting bounced from a stock exchange with a minimum price requirement. In those cases, a reverse split can buy some time to avoid a dreaded delisting.
That is not what is at play here. Instead, GE insists it wants its stock price to be more in line with big industrial peers who have a comparable market cap. Think Honeywell or 3M, old-school manufacturers whose shares trade in the triple digits, or Raytheon, whose stock price is nearly $90 and is perhaps the most similar company to GE in Massachusetts in terms of size and scope.
GE executives say the reverse stock split reflects the company’s transformation, initiated before Culp’s time but accelerated under his watch, to become leaner, more focused and easier for investors to understand. In recent years, GE has divested its oil and gas, train engine, and lighting businesses — to name just a few. It’s bidding goodbye to aircraft leasing. GE Capital, the once high-flying finance arm, is essentially going away. The conglomerate now consists of four parts: health care, aviation, power, and renewable energy.
But GE never adjusted its share count to account for all this slimming and simplifying. Culp noted at GE’s annual meeting in May that the company had nearly 9 billion shares outstanding, the highest for any company of its size in the Standard & Poor’s 500.
Cutting that number down to size, and boosting the share price accordingly, could help insulate GE from the sort of volatility that has struck a variety of companies that have been swarmed in recent months by day traders on Robinhood and other retail investing platforms, said Nick Heymann, an analyst at investment bank William Blair & Co. Meanwhile, the higher price could help GE court more long-term institutional investors, he said, particularly fund managers that might be interested in GE’s efforts to shift power generation away from traditional carbon-burning sources.
Then there are GE skeptics such as Peter Cohan, a management instructor at Babson College and a GE investor for years. (Maybe some of its skeptics were behind the nearly 3 percent drop in GE’s stock on Monday, the first day of trading at the new price point.) Cohan considers the reverse stock split to be mere flimflam, a nonsensical exercise that probably isn’t even worth the relatively low expense. Sophisticated investors know the value hasn’t changed, he said. They also know the company is still worth less than a quarter of its value at its peak, in 2000 during the final days of the Jack Welch era.
For others, the reverse split is immaterial. Morningstar analyst Joshua Aguilar increased his estimate of the company’s worth last week, not because of the pending reverse split, but because GE beat expectations with its second quarter earnings on Tuesday. In particular, Aguilar cited improvements in the once-troubled power division, which he said reported its best operating profit margin in four years.
As a result of the strong quarter, GE on Tuesday raised its cash-flow outlook for the year, to a $3.5 billion to $5 billion range, up from $2.5 billion to $4.5 billion. Such a shift would normally send shares skyward, but the stock barely budged.
You can’t blame investors for the apparent wariness. GE had been on a tear in 2019 as Culp’s turnaround efforts began to take hold after years of problems. Then COVID-19 grounded GE’s aviation division, the former cash cow, in the spring of 2020. The stock plunged again.
Since those dark days, the market cap has essentially doubled after Culp broke out the contingency plans and trimmed expenses in the jet-engine business to account for the slowdown in air travel.
Many questions remain. When will international flights get back on track? Will GE eventually spin off its health care division? Just how much will the broader shift to green energy help GE, and how much will it hurt?
Culp probably will have to answer those questions, and more, to meaningfully advance the company’s stock price. He has a massive payday waiting for him if he can pull it off, not to mention the legacy of accomplishing what could end up being one of the toughest turnarounds in corporate history.
Culp didn’t expect a pandemic to get in the way when he agreed to take the job in 2018. But he never thought this would be easy, either.
A reverse stock split is one thing. But restoring GE’s value, if not its place in the pantheon of Corporate America, is another thing entirely.