General Electric CEO Says Challenging Environment Will Persist

General Electric Company (NYSE: GE) shares have tumbled since the company announced plans to break up the company earlier this month. Bank of America recently hosted a conference call with GE CEO Larry Culp and CFO Carolina Dybeck Happe to discuss management’s focus and the current macroenvironment.

Culp said the plan for GE to divide into three different companies focusing on aviation, health care and energy is similar to a plan he helped execute when he was CEO of Danaher Corporation (NYSE: DHR). Culp said the rationale to spin-off business units for both Danaher and GE was to increase operational focus rather than to simply unlock value for investors.

Related Link: 'A Statement Of Confidence': General Electric Analysts React To Breakup Plans

Difficult Environment: Culp said investors should expect the challenging operational environment to persist for the time being, including supply chain issues and “structural” rather than “transitory” inflation. In addition, recent price increases are likely sticky as GE tries to catch up to current demand levels.

Bank of America analyst Andrew Obin said GE is also dealing with labor shortages as well.

“GE is being careful in industrial automation investments to preserve maximum operational flexibility,” Obin said.

Financial Outlook: Finally, GE management provided updates and clarity for its financial guidance. Management said GE is expecting net debt to drop to $25 billion by the end of 2021 and just $10 billion by the end of 2023. Dybeck Happe also confirmed that 2023 EBUTDA guidance of between $13 billion and $14 billion is unchanged, which Obin said represents a net leverage ratio of under 1.0.

Obin said an investor poll during the call suggests shareholders are positive on GE but have little conviction in the bull thesis at this point.

Bank of America has a Buy rating and a $140 price target for GE.

Benzinga’s Take: After years of restructuring promises and lackluster stock performance, it’s certainly understandable why GE investors would greet the news of a corporate breakup with a large degree of skepticism.

If GE is able to deliver on its guidance for a return to earnings growth and a rapid deleveraging of its balance sheet, the stock could have significant long-term valuation upside.

Photo: Momoneymoproblemz via Wikimedia Commons