Shares of General Electric (GE) have fallen about 50% over the past year, and on May 23 GE saw its stock drop more than 7%, its biggest one-day loss since April 20, 2009. Much of Wednesday’s decline came as CEO John Flannery was speaking to attendees at the Electrical Products Group (EPG) conference in Longboat Key, Florida.
Flannery told the group he thinks Wednesday’s selloff could be due to investors who are disappointed he has not done more—and moved more quickly—to reorganize the company and stem the tide of financial losses, in large part caused by a slowing global market for gas turbines that has dogged the company’s Power division. Flannery acknowledged he has moved at a “deliberate” pace since taking over the company in August of last year.
Flannery, who has worked in various roles at GE since 1987, said he’s heard the grumblings, such as “What’s taking so long?” with the company’s turnaround plan, a plan the chief executive talked about even before he took the reins of GE from outgoing CEO Jeffrey Immelt. In June of last year, about six weeks before assuming the chief executive position, Flannery told Bloomberg: “Investors want visibility and confidence in the future cash flows and competitive position of the company, that’s what translates into a higher stock price. Our focus is running the company for cash and growth.’’
John Flannery, CEO of General Electric
GE’s stock price at the time was near $ 29 a share. Today it’s below $ 15, even after gaining traction earlier this week when the company announced an $ 11.1 billion deal to merge its transportation business with Wabtec Corp., a railroad equipment manufacturer.
Flannery told the EPG attendees GE is a “huge” company, has a “long arc of history,” and he has approached changes in a “very deliberate” and “thoughtful” way. “So being deliberate and then moving when things make sense as opposed to moving just because somebody wants us to, it’s just my style,” Flannery said Wednesday. “I’m highly confident we will make the decisions with the portfolio as and when [they] unfold, that will be a good decision for the portfolio.”
Flannery reiterated Wednesday that the company’s financial guidance range for 2018 is unchanged, but said he ultimately expects results will be in the lower end of the range due to continued pressure on the power business, saying he sees a “soft end market” for power continuing into 2020.
‘Back to Basics’
GE released its annual report covering 2017 results in February, and at the time unveiled a three-part strategy to help its power division operate more efficiently. GE Power President and CEO Russell Stokes in a letter to shareholders separate from the report said the division would need to get “back to basics” moving forward, reducing manufacturing capacity by 30% or more, and reiterating the earlier announcement of 12,000 job cuts.
Since Flannery took over GE, the company has shed assets. It sold its Water & Process Technologies business to SUEZ; sold its Industrial Solutions (electrification) unit to ABB; and bought Alstom’s stakes in three energy joint ventures formed when GE acquired Alstom’s energy business a few years ago, a deal finalized in November 2015. The acquisition of Alstom, though, has weighed heavily on GE’s finances. It was Flannery who spearheaded the Alstom acquisition when he led the company’s mergers and acquisitions efforts during that period.
In the annual report in February, Flannery said of the shedding of assets: “These considerations have been widely reported as a plan to ‘break up’ GE. They are no more and no less than a desire and an obligation to explore every option to ensure the best results for our customers, employees and owners.” He also said: “There will be a GE in the future, but it will look different from how it does today.”
Turbine Market Struggles
The global gas turbine market has taken a hit from the growth of renewable energy sources, most notably solar and wind power. Siemens recently announced a temporary shutdown of its Power & Gas division, after earlier saying it would cut 6,900 jobs.
Vistra Energy and Dominion Energy, two of the largest U.S. utilities, have each said they do not plan to build more natural gas-fired power plants, instead turning their attention to solar facilities. Dominion has said it plans to build about 4,700 MW of solar generation capacity by 2033.
Flannery noted that reality in his remarks Wednesday. He said GE is planning for flat profits from power this year—those profits dropped 53% in 2017, he said. “This is not going to be a quick fix,” Flannery said. “But there is, at the end of the day, long-life assets here with intrinsic economic value. We’re going to make the most of what we have there.”
GE has dropped to third place behind Mitsubishi Hitachi Power Systems (MHPS) and Siemens in gas turbine sales; earlier this month it announced it would expand its cross-fleet service offerings to more of Siemens and MHPS’s technology.
Stokes and Flannery have each said they expect global demand for natural gas-fueled power generation will grow about 2% annually in the near-term even as the transition to renewable power continues. In its most recent earnings reports, GE said its power equipment orders fell 41% in the first quarter of this year, on the heels of a 17% drop in orders in 2017. It also said revenue in its renewables unit—which it has tabbed as a $ 10 billion-a-year venture—fell 6% last year.
Interestingly, the U.S. Energy Information Administration recently said it expects 21 GW of new gas-fired power generation capacity will enter service this year, the bulk of an expected 32 GW of total new capacity. The agency said that for the first time in five years, renewables capacity will not make up the majority of new generation.
—Darrell Proctor is a POWER associate editor (@DarrellProctor1, @POWERmagazine).
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