General Electric has a new CEO. The man chosen for the job, John Flannery, is the quintessential company man, with over three decades of experience at "The General." And while his resume is indeed impressive, one of the main narratives surrounding the board's decision is that Flannery was responsible for turning around GE Healthcare. Flannery's accomplishments as the head of GE Healthcare may have huge implications for GE's stock in the years ahead.
General Electric Healthcare's LOGIQ E9 XDclear 2.0 Ultrasound System. Image source: GE.
Handing off the baton
The news could not have been bigger. General Electric had, well, a new general. Jeff Immelt, who took the reigns from the legendary Jack Welch in 2001, handed the keys to the CEO's office off to John Flannery -- a man who has given 30-plus years of his life and relocated his family around the world more than once.
True to form, when the announcement was made, all present sung their praises of Flannery and his predecessor. Most telling was GE's new commander's tenure at GE Healthcare. In particular, the expansion of the division's gross profit margin under his leadership. The press release put forth by GE said the following:
Since joining GE Healthcare in 2014, Mr. Flannery has led the turnaround of the business, increasing organic revenue by five percent and margins by 100 bps in 2016. He positioned GE Healthcare for continued success with technology leadership in core imaging, created digital platforms and solutions, expanded Life Sciences through bioprocess solutions, and added key technology to its cell therapy systems business. He also launched Sustainable Healthcare Solutions, which is focused on bringing disruptive technologies to healthcare providers across emerging markets.
This sounds great, but upon closer inspection, there is arguably not much to be truly excited about.
Tough act to follow
Below are the last five years worth of revenue and operating profit figures for GE's main divisions, with healthcare highlighted in bold:
General Electric Segment Revenues:
| 2016 | 2015 | 2014 | 2013 | 2012 | |
|---|---|---|---|---|---|
| Power | $26,827 | $21,490 | $20,580 | $19,315 | $20,364 |
| Renewable Energy | $9,033 | $6,273 | $6,399 | $4,824 | $7,373 |
| Oil & Gas | $12,898 | $16,450 | $19,085 | $17,341 | $15,539 |
| Aviation | $26,261 | $24,660 | $23,990 | $21,911 | $19,994 |
| Healthcare | $18,291 | $17,639 | $18,299 | $18,200 | $18,290 |
| Transportation | $4,713 | $5,933 | $5,650 | $5,885 | $5,608 |
| Energy Connections & Lighting | $15,133 | $16,351 | $15,724 | $15,907 | $15,379 |
Data source: General Electric FY 2016 10-K.
General Electric Segment Profit:
| Segment | 2016 | 2015 | 2014 | 2013 | 2012 |
|---|---|---|---|---|---|
| Power | 4,979 | 4,502 | 4,486 | 4,328 | 4,368 |
| Renewable Energy | 576 | 431 | 694 | 485 | 914 |
| Oil & Gas | 1,392 | 2,427 | 2,758 | 2,357 | 2,064 |
| Aviation | 6,115 | 5,507 | 4,973 | 4,345 | 3,747 |
| Healthcare | 3,161 | 2,882 | 3,047 | 3,048 | 2,920 |
| Transportation | 1,064 | 1,273 | 1,130 | 1,166 | 1,031 |
| Energy Connections & Lighting | 311 | 944 | 677 | 491 | 442 |
Data source: General Electric FY 2016 10-K.
I wanted to rally behind General Electric's new CEO just as much as anyone. The company is and has been, for a century, the symbol of American innovation.
But in choosing Flannery as its CEO, GE's board of directors gave investors an unpleasant hint as to what they believe the future might hold. He joined GE Healthcare in 2014, and through FY 2016 segment profits have increased a whopping 3.7% (since I know you're curious, that's 1.85% per year, basically the long-term inflation rate) and basically kept revenues even. We're also told that, through savvy management, Healthcare's gross profit margin was miraculously expanded by 100 bps.
Healthcare wasn't even the best-performing division over the five-year time frame. That title belongs to the Aviation division, which saw profits expand 13% per year from 2012 to 2016.
Tough act to follow
So, what are we left to conclude? I'm inclined to give Flannery the benefit of the doubt and grant that he is the right man for the job. He has given over 30 years of his life to General Electric, even moving his family to India in order to lead GE's business development efforts there. Unfortunately, having the right man at the helm doesn't guarantee business success or superior investment returns.
Predecessor Jeff Immelt's own career bears this out. Immelt led the company for 16 years, taking the reigns from the legendary Jack Welch in 2001. GE's stock, which surged some 2,800% under Welch's 20-year tenure, has been a chronic underperformer: down 30% since he took on the role of CEO in 2001. Does this mean Immelt is a poor leader? Of course not. At the very least, it should be said that he had a very tough act to follow -- on top of dealing with monumental events like 9/11 and the 2008 Financial Crisis. Because of the financial crisis, for example, Immelt was forced to spend an inordinate amount of time divesting GE Capital and its $200 billion in assets. In a cruel twist of fate, GE Capital was a division that Welch himself created.
Flannery may very well be the right man for the job, but in choosing him, GE's board seems to be admitting that the company's future will be one of playing defense via cost cuts and divestitures. IF GE Healthcare's performance in recent is any indication, profits and revenue growth are likely to be uninspiring in the years ahead.
