Guest Feature: An Outsider Look at General Electric
July 2, 2019
Happy Canada Day! Hopefully this article is a nice start to your first day back to work. I am proud to introduce my second, but not any less important, guest writer: Mark Letchumanan. Today’s post comes almost 4 months after Mark first submitted to me this writing on GE’s new CEO. Fortunately, Mark’s words are timeless. I hope you find as much value from his insight as I did.
Before I let you enjoy Mark’s writing, I just want to provide a small introduction. Mark introduced himself to me at the beginning of 2019 after he read one of my blog posts that I posted in the Capital Compounders FB group. This is one of the reasons I prefer to keep my writing free: I consistently meet amazing people.
Mark and I immediately got along, and I eventually learned that he has already passed the CFA Level II exam and is currently working in the investment management field. Mark quickly became a mentor to me in many aspects beyond just investing. As someone who believes in God, I don’t think it was coincidence Mark was placed in my life during a period that definitely ranks among the more challenging.
Mark has been largely influential in my investment management as well. He’s pushed me to concentrate my portfolio and has challenged my convictions in multiple holdings (an extremely valuable asset for me). He even did some ground work for me by attending RIWI’s annual general meeting back on May 15. This reinforced our confidence in the company (I provide an update halfway through my RIWI article).
I had told Mark how writing has benefited my investing career immensely, so I encouraged him to write on a company of interest, which I would in turn post on this InvestorsFriend blog (an offer that is open to any other readers as well). Mark was hesitant at first, but he worked tirelessly and diligently to finish his writing on GE back on March 11. I gave it a read, and it was quite incredible, not to mention for his first go…and I let him down.
He submitted his writing concurrent to my sale of Shopify and discovery of RIWI, both of which I felt obliged to immediately write about for my readers. I additionally (unnecessarily) wrote an introduction to The Outsiders so my readers would have some background knowledge before reading Mark’s article which was inspired by that book.
I then realized how screwed I was for the CFA Level I exam if I didn’t focus on my studies immediately, and essentially put my entire life on hold for the last 3 months…which leads me to where we are today.
None of the above justifies the delay of me posting his writing, so this is my formal apology to Mark. Fortunately he is a very forgiving man, but I still feel a public apology is deserved.
Without further ado, I introduce Mark’s writing below 🙂
An Outsider Look at General Electric
General Electric has been a bit of a mess these last few years. With the recent appointment of Larry Culp, their third CEO in three years, are we to believe things will be different this time? Is there a way for us to evaluate whether an investment opportunity exists with GE? I believe there is. Similar to evaluating a startup, let’s begin by looking at their new CEO and decipher whether he has some of the traits found among other successful, market-beating leaders of conglomerates.
Larry Culp’s Background
When working for Danaher Corporation, “it had about $4 billion in annual revenue when Mr. Culp took over as CEO in 2001 and $20 billion when he retired about 14 years later.” Market capitalization for the company grew five times during Culp’s tenure (primarily through accretive acquisitions). At age 51, citing Thomas Jefferson and “what he wrote about the benefits of revolution every 20 years or so,” Culp retired from Danaher at the peak of his game (much like Michael Jordan retiring the first time after winning three NBA championships). It also didn’t hurt that Culp had earned roughly $200 million in compensation during his tenure. Shortly after leaving Danaher, Culp accepted a lecturer role with Harvard’s MBA program explaining “one of the major challenges we have as a country, and the world for that matter, is the state of our leadership, broadly defined.”
So it was a surprise when Culp took on the role of Chairman and CEO of troubled General Electric in the fall of 2018. When questioned about what motivated him to accept the position after a storied career and amassing significant wealth, his response was telling.
“It was not an easy decision to join the board, frankly, let alone when the board asked me to become Chair and CEO to take this on. But I think the decision points in both instances were driven by the same logic… I know having looked at this company for a long time, GE is important. What we do in terms of aviation, health care, energy, it’s important, and frankly this company matters, particularly to the United States. This is a challenge of a lifetime given where we find the company today… And I began to see GE shareholders, GE board members, pensioners… 2nd, 3rd generation, all very unhappy with where we are, but committed to the company… and I thought if I could be helpful, if I could serve those people, that would be a good thing to do at [age] 55.”[emphasis mine]
Culp seems to be one of those rare individuals with exceptional leadership abilities, strong financial acumen, and a genuine concern for stakeholders.
As the first CEO in GE’s history hired from outside the organization, Culp comes with a unique perspective and his own proven practices. For those familiar with William Thorndike’s The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, Culp had a reputation while at Danaher for an obsession with operational efficiency, decentralization, and disciplined acquisitions, much like the heroes in Thorndike’s book.
What Needs to be Done?
In her book Investing Between the Lines: How to Make Smarter Decisions By Decoding CEO Communications, L.J. Rittenhouse demonstrated CEOs who write transparent and honest shareholder letters generate superior returns for shareholders. In his first shareholder letter, Culp clearly outlines GE’s reality and presents an understandable path and strategy for the days to come. Furthermore, I found Culp’s letter to be completely rational and refreshingly absent of “inspiring the soldiers” speak. The man knows what needs to be done to turn GE around and is eager to do it. According to Larry, the company’s two priorities are: 1) improve financial position; and 2) strengthen businesses, starting with Power.
- Improve Financial Position: To date, Culp has cut GE’s dividend (freeing up $4 billion of cash annually), sold roughly $41 billion in assets (industrials and biopharma), and has prioritized deleveraging the balance sheet. In only a few months, Culp has taken several bold steps towards improving GE’s financial position, and he is only getting started.
- Strengthen businesses, starting with Power (through decentralization and operational efficiency): Culp is moving the entire organization towards decentralization. For example, “by moving responsibility for collections closer to the customer relationship managers, Power was able to improve its visibility to cash and collect it earlier in the quarter. Where we used to get just 35% of our cash in the first two months of the quarter, in the fourth quarter, Power increased this to 50%. This kind of operational improvement takes hard work, and it is a multi-year journey, but I’m encouraged by the Power team’s dedication and progress.”
During his time at Danaher, he met with each business unit face-to-face monthly for assessments, maintained “maniacal focus on efficiency,” and publicly praised workers and teams for even small operational improvements. Danaher was also frugal, maintaining their head office on the 8th floor of nondescript building with no signs for the company in the lobby or on the building. It appears Culp is now bringing these practices to GE.
For instance, Culp explains, “Over time, the biggest lever we have to improve our financial position is to prioritize cash generation in each of our businesses. To that end, we are improving how we operationally manage cash every day, in every business, and are using lean management practices to improve working capital levels. For example, our Aviation team used lean and digital tools to improve average cycle time for the LEAP-1B, reducing the average engine assembly time by 10 days, or 36 percent. This led to lower inventory levels, more efficient throughput, and ultimately more available cash.”
He goes on, “We reorganized our Global Growth Organization and Global Operations to serve local market and GE business needs more efficiently. Going forward, our center will be smaller and primarily focused on strategy, capital allocation, research, talent, and governance. In 2018, we reduced headquarters spend by over $400 million, and we’re de-layering at both Corporate and our businesses to improve accountability and visibility across our teams.”
Culp is getting his ducks in a row.
The current season at GE is one of tilling the soil. I believe 2019 will be a year focused on improving efficiency and improving financial health, thus freeing up cash flow (stocking the armoury). If Culp is successful in executing the strategy laid out in this year’s shareholder letter, GE will be positioned for growth. With growing cash flows, Culp has an opportunity to live up to his reputation as a disciplined and strategic acquirer of companies.
As either an investor or CEO, we must decide how best to steward our capital. I often struggle when it comes to identifying what the next big thing, successful product, or in-demand service might be. However, I feel much more confident in being able to identify a competent business operator and proven capital allocator. No-brainer investments for me are opportunities to invest in proven capital allocators at a reasonable price. I believe such an opportunity recently presented itself in the form of General Electric.
I have no idea how to begin to value GE with so much changing so quickly. I only know that it has lost more than $200 billion in market capitalization in the past two years, and is now (in my opinion) in much better hands than it has been in a very long time. For this reason, I believe GE is on sale.
I hope you enjoyed that article as much as I did! Thanks again to Mark Letchumanan. I definitely am inspired to do some more reading on GE. I think everyone can agree that they are one of America’s iconic brands.
Since Mark first wrote this, there has been a memorable article written on the progress Culp is currently making at GE (as recently as June), including a reference to how his former employees have been buying up GE shares because they believe in Culp that much:
If you would like to respond to Mark’s article, you can either find him on LinkedIn, or respond to this email and I can pass any comments along!
Once again, thanks for taking the time to read today, and if you would like to see my prior writings, the archive can be found here (recently updated). As always, I’m just an email away 🙂
“We make a living by what we get. We make a life by what we give.”
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