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General Electric: New Beginnings

Trian Partners, the activist investor that considers itself a constructive investor, waged a losing proxy battle at Procter & Gamble (PG). Trian has had its hands full there, but the fund just got a board seat at General Electric (GE). Trian put out one of its famous white papers re: GE in 2015, but the stock has done little over the last three years, underperforming the S&P 500 by 30 percentage points over the period.

Things are moving fast at GE, finally.

GE is really shaking things up after adding Trian to the board. After Trian’s board appointment and former GE CEO Jeff Immelt stepping down from the board chair position, the relatively new GE CEO (since Aug.), John Flannery, has helped clear out the C-suite. GE CFO, Jeff Bornstein, is leaving at the end of the year and other high-level executives - the head of marketing and the top international executive - are both also leaving.

GE has put Trian’s Ed Garden on the board. A much-needed step. After the cleaning of the proverbial house, look for serious guidance from Flannery on cost cuts and margin-boosting plans.

Flannery’s plans - expected to be announced on Nov. 13 - will be the telltale. Trian’s board appointment also comes as GE is amidst a portfolio review. Trian now gets a look at GE’s detailed financials and board discussions, and provide some suggestions here.

In the near-term, the likely announcement next month is more staff cuts and possibly slowing down the new headquarter buildout to a crawl. Trian will also likely push GE to sell off its fleet of corporate jets. While GE is focused on keeping the dividend, Trian will likely be less concerned with keeping it if it means freeing up cash for growth opportunities. However, Trian has one-seat on an 18-person board, so the worry that ‘was’ that GE could appease the activist with a board seat and continue with the status quo. But that doesn’t appear to be the case as Flannery has taken an aggressive approach to turning around GE.

What to expect with Trian on the board

What we’re going to see is more deals for GE. That is a right-sizing of the portfolio even further. GE has already been active in slimming down its portfolio, including the sale of its industrial unit to ABB.

We’ll likely see a landmark deal in 2018, which includes spinning off or selling the GE Healthcare business.

This is a catch 22, however, as it is still a growth business for GE and is a key part of its push into the digital world. Instead, Trian might push GE to consider making GE Healthcare a staple business and instead dump the transportation (i.e. locomotives) business or lighting, or a spinoff of the Baker Hughes business.

It’s very likely that GE will likely continue downsizing once Trian gets on the board and will likely sell a major business before 2018. Then, we could see a ‘new’ GE in 2018. That is, with Trian at GE and Third Point at Honeywell (HON), we could see a collaboration.

However, we likely won’t see a large scale breakup, like the merger and breakup of DowDuPont (DWDP), which Trian was a part of.

Business as usual?

Right now, the business is already a lot smaller with GE Capital gone, and it’s working its way back to being an industrial-focused company. The seven core businesses that are the industrial business all have ties to the infrastructure market. Its core business - from aircraft engines, turbines, to medical imaging - will do well if the economy continues to grow.

One thing that Flannery will likely position GE for is getting more service contracts and revenues. These revenues are higher margin (30% or more) and can be more value-add for end-customers. This all is part of GE’s push into digital services as well. It will likely look to leverage the Alstom’s business and boost value-add service offerings there. A business that it’s still trying to integrate effectively. Embarking on digital services opens a whole new revenue avenue and customer base. It has a lot of Big Data that it can analyze and sell predictive analysis. Assuming it doesn’t sell its Baker Hughes business there is a market opportunity for providing oilfield digital and predictive services.  

But more near-term pressure

With the CFO gone, it’s likely Flannery has some big new plans, including resetting the planned $1 billion in cost cuts that Immelt laid out earlier this year. So, the key for the market is to go ahead and get adjusted to the fact that GE won’t be generating $2 a share in EPS as they’d previously laid out in 2016. Flannery will likely cut that number sizably. And don’t be surprised if Flannery does lay out a dividend cut at the meeting. All this might create even more pressure on GE’s stock, but all of which are also long-term positives. Look for any pressure that gets GE shares under $20 as a potential buying opportunity.

We’ll likely see a cut in the financial projections at the November 13 meeting. There, Flannery will lay out his long-term goals. It’s worthwhile to play wait-and-see until then and to see what Flannery brings to the table - although if he keeps up with his recent aggressive changes - it’ll be a positive for GE shareholders.