October 27, 2022

Breakingviews: GE is hurting but Larry Culp’s legacy has hope yet

by Breakingviews.

For Larry Culp, it’s not the journey but the destination. The chief executive of General Electric said on Tuesday while reporting third-quarter earnings that the $80 billion industrial conglomerate was on track to break up into three pieces. He will run the aviation division – the strongest unit at the company, by far. And renewables, the weakest, looks set to benefit from a massive U.S. government spending package. If all goes perfectly, it could be enough to salvage Culp’s legacy.

It doesn’t look so easy now. The company said it was lowering earnings guidance for the year. Free cash flow, a closely watched metric, fell 11% from the same quarter in 2021. And while revenue overall inched up 3%, inflation pressures took their toll. In particular, the renewable energy group was a drag. Orders plummeted 43% year-on-year and revenue declined 15% as demand in the power division, which focuses on more traditional sources, rose.

In healthcare, both orders and revenue were up just slightly in the first nine months of the year. But its aerospace unit remains a bright spot. Revenue jumped 24% year-on-year, helped by a remarkable increase in the division that helps to service airplanes. Orders were up too, and margins even expanded, suggesting that the division that makes and fixes airplane parts is firing on all cylinders.

That’s lucky for Culp, as it’s the business he’ll be running after the breakup dust settles. Perhaps offering him the job at the division that doesn’t need help is the best thing to do, considering his tenure at GE hasn’t been great. Since his appointment as CEO was announced four years ago, GE’s shares have dropped 16% while Danaher is up more than 130% and Honeywell International is up 17%.

But for him – and shareholders – there’s an ace in the hole. U.S. President Joe Biden’s Inflation Reduction Act has earmarked around $370 billion for energy, a spending package that is aligned with what will become GE’s Vernova group, housing the renewables business. Culp on Tuesday called the legislation “game changing,” as its mandate aligns “tightly” with GE’s decarbonization strategies. If it succeeded in juicing up Vernova’s revenue, it could be game-changing for Culp’s legacy too.

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