GE: 6 lessons from a gored bull

Crux note: Porter Stansberry saw the writing on the wall and spoke up… years before the story of GE’s errant business practices broke news. But now that the stock is trading at a multiyear low, Wall Street is starting to pay attention. Catch up on Porter’s take here

From Barron’s:

General Electric (GE), has lost half of its value in the past year, making it the worst performing stock in the Dow Jones Industrial Average during that period, and forcing bulls everywhere to reconsider their bullishness and contemplate just what they got wrong. Melius Research’s Scott Davis is one of those bulls, and last night he published his own mea culpa – but refrained from changing his rating on the shares.

Davis has a Buy rating and $27 price target on GE (nearly twice the stock’s level today), but he readily admits that this call hasn’t worked out. Not in the least. Nonetheless, he still thinks that there are valuable lessons to be learned from this, about GE and other companies moving forward.

Lesson 1: Watch the Cash Flow 

Hindsight is 20/20, so it’s easy to look back at GE’s declining cash and see that management’s excuses of cyclicality/timing were just that – excuses. Davis writes that GE’s management “is good at explaining [these signs] away, and making us look like we were stupid to even question them.” This was made all the more difficult by the fact that plenty of companies do have legitimate ebbs and flows of cash in their lifetime, and the fact that Davis believes “that GE executives acted in a manner consistent with some level of deception.” For now, he sees green shoots of a “sharp improvement” in GE’s cash flow, but he admits that the company has a lot of ground to make up for, and it will take time.

Lesson 2: Watch the Culture

Along with cash flow, GE’s culture began to fray over time, which should have been another warning signal: GE chased contracts in China just to show emerging markets growth and threw good money after bad in “questionable business dealing.” Davis writes that GE’s culture became “arrogant,” and at this point, it’s too far gone to save: The company’s best chance is to create smaller, more-focused entities that will build their own culture over time. Changes in culture are harder to spot than cash flow, but just as crucial to a company’s success – or in this case, downfall. “[T]he culture that once made GE great is long gone. Romancing the past will not bring it back.”

Lesson 3: Avoid Weak Boards 

It’s easy to see now that GE’s board of directors wasn’t doing the job, but things were engineered that way. Davis writes that management created a board filled with yes-men and lacking diversity, one that backed even the most ill-fated projects that should have been obviously voted down. He thinks that the new board is a start when it comes to correcting these problems, but that’s not enough. Going forward, Davis plans to “explicitly highlight any company we cover with an unusually large number of board members, boards that lack diversity, and boards that lack talent in the world of technology, particularly software.”

Continue reading at Barron’s

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