Jun 14, 2017
CREDIT SUISSE: GE's new CEO should fix these 6 issues to send its stock skyrocketing
General Electric's stock price jumped almost 4% on Monday after CEO Jeff Immelt announced he would be stepping down, and it has the potential to continue that rise under new CEO John Flannery.
Credit Suisse, one of the biggest bulls on the company, recently released a list of what it sees as the most important things Flannery can do to calm investor's nerves. The firm called bearish GE sentiment "overblown" days before the new CEO announcement.
"We think that GE is not a 'broken company'," the Credit Suisse analysts wrote earlier this month, "although it might be somewhat misunderstood."
According to Credit Suisse, GE and Flannery should address these six issues to send the stock skyrocketing:
- Capital Discipline: This has been a strong area for GE in recent years, according to Credit Suisse. The main thing Flannery can do in this category is to reassure investors that no drastic moves will be made. Drastic measures would include dividend cuts and an increased mergers and acquisitions pace after an unpopular Alstom acquisition. The company has only decreased its dividends twice since 2003, according to data from Markets Insider.
- Operating Margins: This is a big area of disappointment for investors. Luckily, Flannery has a positive track record of improving these margins in his previous position as president of the GE Healthcare division while the rest of the company was declining.
- Cash Flow: "We need to hear from Mr. Flannery how and why better cash flow will be forthcoming," Credit Suisse wrote. Free cash flow, the amount of money a company has after spending what it needs to operate and expand, was not generally great at GE under Immelt. Again, Flannery has shown the ability to increase this free cash flow metric in his previous position.
- Medium-term earnings: GE has issued a $2 EPS target for 2018. Some investors are skeptical of this target, according to Credit Suisse. The firm suggests Flannery might want to lower the target and increase earnings transparency.
- Portfolio Cleanup: GE is a huge company, both by market capitalization and the number of investments. Immelt cleaned up GE's portfolio by selling several of the company's businesses, but Credit Suisse suggests going even further to focus the company's portfolio. "Oil & Gas and Energy Connections may be some of the more likely candidates for divestment, in our view," Credit Suisse said.
- Digital Strategy: GE was one of the first companies to emphasize its advantages in digital technologies, but has since been joined by a litany of other companies hoping to cash in on the ever-growing industrial digital strategy.
If Flannery is able to implement these changes at GE, the company's shares could increase significantly, Credit Suisse says. The bank is optimistic that Flannery will be able to pull the transition off, given his track record at GE Healthcare. Credit Suisse has a price target of $34.00, about 21.6% higher than the current price.
GE's stock price has fallen about 10% so far this year.
Business Insider Markets
by Seth Archer