General Electric (GE) laid out a plan Monday to radically shrink its vast portfolio of businesses as well as slash its prized dividend by 50% — but analysts questioned whether those portfolio moves go far enough.
XAutoplay: On | OffThe industrial conglomerate said it will focus resources on just three key divisions — aviation, power and health care — and signaled a pullback or potential exit in due course from Baker Hughes (BHGE), the oilfield services business in which it holds a majority stake.
Transportation, industrial solutions, and current and lighting, as well as more than 10 other businesses, are among divisions GE could divest as it seeks to shed $20 billion in assets over the next one to two years.
“This is a heavy lift,” CEO John Flannery said in a keenly awaited meeting with analysts early Monday. “We have not performed well for our owners. That is unacceptable, and we are doing what it takes to correct that.”
Flannery also set a goal of adjusted EPS of $1.00-1.07 next year, slashing by nearly half the target of $2 it originally set in 2015. Wall Street was forecasting $1.15, according to Zacks Investment Research.
And GE will target industrial free cash flow of $6 billion to $7 billion in 2018, up from an estimated $3 billion this year. And the number of directors on the GE board will be reduced to 12 next year from 18 currently.
But Wall Street analysts weren’t convinced, citing numerous challenges that remain.
“We see a core operating performance that is below plan, and, currently, a consensus expectations curve that we think remains too high, FCF that is the weakest in the sector, and, with that backdrop, a valuation that is expensive, with limited quick-fix catalysts to change the narrative,” JPMorgan analyst Steve Tusa wrote, reiterating an underweight on GE stock and a price target of 17.
Analyst Scott Davis at Melius Research said investors had expected bolder moves and a greater sense of urgency from Flannery, adding that “It’s not clear why a bigger spinoff didn’t make the cut.”
Still, he doesn’t how things will get much worse for GE, predicting the stock will bottom out next year and recover in 2019. He has a buy rating on GE and a price target of 35.
Analyst Deane Dray at RBC Capital Markets wrote early Monday that Flannery’s new agenda “marks a new era” for GE, but he added “the pushback is likely to be the extended period needed to implement all of these actions, posing execution risk.” Dray has an outperform rating on GE stock and a price target of 25.
He also saw as “a touch disappointing” that GE will continue to exclude nonoperating pensions from its new framework for EPS reporting metrics. The change comes after years of flak from the investment community for the lack in transparency in reporting key figures.
Shares of GE plunged 6% to 19.25 in afternoon trade on the stock market today, undercutting the August 2015 flash-crash low of 19.37 and hitting the lowest level since June 2012.
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Flannery on Monday affirmed a commitment to GE Power, saying it’s a good franchise in a tough market that “can improve in one to two years.” But he described the “cyclicality and commodity nature of the business” at Baker Hughes as a significant problem, adding GE is looking at exit options.
For GE Digital — the software unit that GE has for years positioned as key to its tech-industrial transformation — Flannery sees a “much more focused strategy” centered on a handful of applications.
Meanwhile, the CEO acknowledged the “gravity” of the 50% cut in annual dividend to 48 cents for shareholders, who depend on it for current income.
“That said, the reduction of the dividend is a product really of where we are as a company right now,” he said, adding GE’s dividend has been in excess of its industrial cash flow for several years now.