GE’s CEO Can’t Seem to Stop the Stock From Tumbling

• February 26 2018
• Rick Clough

General Electric Co. plunged again as investors spurned Chief Executive Officer John Flannery’s latest charm offensive.

General Electric Co. plunged again as investors spurned Chief Executive Officer John Flannery’s latest charm offensive.

The CEO’s letter to shareholders and a board overhaul announced Monday failed to soothe concerns about looming liabilities on GE’s balance sheet, which the company detailed in its annual report after markets closed Feb. 23.

In the latest potential hurdle, GE warned it risks new penalties as the U.S. Department of Justice continues an investigation of the company’s defunct subprime-mortgage lender. GE is also the subject of an accounting inquiry by the Securities and Exchange Commission, which it disclosed last month shortly after taking a $6.2 billion charge related to an old insurance portfolio. 

“The company continues to be dogged by legacy liabilities and missteps,” Deane Dray, an analyst at RBC Capital Markets, said in a note to clients.

Read more: Buffett says he was ‘staggered’ by GE’s charge

GE was the day’s biggest decliner in the Dow Jones Industrial Average on a day that the benchmark index rose. The shares fell 2.8 percent to $14.09 in New York after earlier hitting the lowest intraday price since July 2010. GE tumbled 17 percent this year through Feb. 23 after plummeting 45 percent last year, making it the biggest laggard on the Dow in both cases.

In his letter to shareholders, Flannery acknowledged a “very tough year” in 2017. But he insisted that GE is rethinking its structure, cutting costs and enhancing management accountability. It’s also following through on a pledge to overhaul its board, with the nomination of an accounting expert and two former industrial CEOs.

“How the company is being portrayed in certain quarters is overwrought and, in most cases, does not reflect the reality of GE that our customers and employees are seeing around the world,” Flannery said in the letter. “There are things we need to fix. But we can. We know how to. And we will.”

CEO’s Confidence

The letter marks Flannery’s latest attempt to change the narrative around GE, which is grappling with one of the deepest slumps in its 126-year history. The new CEO, who took over Jeffrey Immelt’s longtime post last year, has acknowledged that internal mistakes have exacerbated the challenge of flagging demand for its products, such as gas turbines and locomotives.

Still, Flannery said he has faith in GE’s future, with areas such as software and 3-D printing offering hope. By narrowing the focus of GE’s digital business and targeting existing customers, the company should be able to double sales of its Predix operating system to $1 billion in 2018, Flannery said.

In a separate statement, GE announced the nomination of former Danaher Corp. CEO Larry Culp and Thomas Horton, who served as CEO of American Airlines, to the board in advance of the annual shareholder meeting scheduled for April 25.

Leslie Seidman, who was chairman of the Financial Accounting Standards Board, is also being put up for a board seat, GE said. That comes as GE faces an SEC investigation into its accounting for the insurance portfolio and service contracts in the industrial operations.

Narrower Focus

The company also announced the departure of eight current directors. Among those remaining are lead director Jack Brennan and Ed Garden, a representative of activist shareholder Trian Fund Management, who was appointed late last year. Brennan will help facilitate the transition and won’t stand for re-election in 2019, GE said.

GE has said it plans to focus on energy, aviation and health care as it sheds divisions such as transportation and lighting.

That may not be the end of the portfolio changes. Flannery has said he’s still evaluating the structure of the Boston-based conglomerate, and he’ll consider all options, including possibly separating the business units into publicly traded companies. The CEO reiterated that sentiment in his letter, but shied away from calling it a breakup.

Buffett Interest

“We will take steps only when we see a clear path to better long-term outcomes for GE,” Flannery said. “There will be a GE in the future, but it will look different from how it does today.”

GE’s stance has generated widespread interest, including from Warren Buffett. In an interview with CNBC, the billionaire investor both criticized GE’s accounting missteps and said he wouldn’t rule out an acquisition of assets, depending on what GE is willing to sell.

“If we liked the business and the price was right, we could write a check for cash and that would apply to GE,” Buffett said. “We’re always in the market for a big business that we can understand and that we like.”