In the movie Avengers: Infinity War, Doctor Strange uses the power of the Time Stone to explore “14,000,605” possible outcomes of the struggle against supervillain Thanos.
“How many did we win?” asks Tony Stark, when Strange has finished.
“One,” replies Strange.
While the current situation of troubled conglomerate General Electric (NYSE:GE) isn’t quite as dire as the one faced by the Avengers’ — well, probably not, anyway — the industrial giant is also faced with a bunch of unappealing options, and has limited opportunities for success. Investors are bearish on the stock, which has lost almost 75% of its value over the past three years.
But that doesn’t mean that failure is inevitable. Investors should be aware that the possibility exists for the company to not only survive, but thrive. Here’s the most plausible way GE could get itself back on track.
To the skies
There’s no question that GE’s easiest path to success runs through its standout aviation unit. It’s easily the company’s strongest business segment. To continue the Marvel metaphor, if GE were the Avengers, GE Aviation would be the Hulk.
It’s hard to overstate how well GE Aviation has been doing. GE is the world’s largest manufacturer of aircraft engines, if you include its joint venture with Safran, CFM International. It provides engines for about 70% of the world’s narrow-body jets, including hot sellers like the Boeing 737 Max and Airbus A320neo. And not only did it post an incredible 22.3% profit margin in the most recent quarter, its profits were up 25% year over year.
Now, it’s possible those monster margins might fluctuate a bit if GE ramps up engine production — equipment sales have lower margins than components and services revenue. The Aviation unit’s margins, however, have been above 20% since 2014, and are easily the company’s highest. With the cost curve on CFM’s LEAP engine coming down, and global air passenger travel up 6.8% year to date, this business should continue to be a powerhouse for the company.
New CEO Larry Culp recognizes this. On the most recent earnings call, he said that Aviation “tore the cover off the ball,” and described it as “the standout force” in the most recent quarter. And while the company has plans to spin off or sell most of its other divisions — including its second-best unit, Healthcare — management has been crystal clear that they have no intention of doing so with Aviation.
But how can GE unleash the power of its aviation division when the rest of the company is drowning in debt, with plenty of its divisions beset by low margins, weak markets, or both?
An appealing prequel
Well, without the ability to look into the future, GE’s best bet might be to look to the past, and emulate what DuPont did in the mid-2010s. Back then, DuPont was facing similar struggles: Its outperforming agricultural sciences division was being held back by a lot of debt, as well as some serious environmental and legal liabilities stemming from releases of the toxic chemical PFOA from the company’s Teflon manufacturing plants. It also had activist investor Nelson Peltz agitating for big changes.
So DuPont decided to cut its liabilities loose. It created a subsidiary called Chemours (NYSE:CC), loaded it up with $4 billion of net debt, the Teflon business (and the legal and environmental liabilities that went with it), plus the company’s volatile titanium dioxide business, for good measure. Then it cut the subsidiary loose in July 2015. Chemours’ stock sank like a stone, falling by 85% less than a year after the spinoff.
Freed from that dead weight, though, DuPont’s stock rose steadily throughout 2016 and 2017, until the company merged with rival Dow Chemical to form DowDuPont (NYSE:DWDP). Interestingly, thanks to a recovering titanium dioxide market — and a PFOA settlement that wasn’t nearly as bad as it could have been — Chemours’ stock has actually outperformed its parent’s since the spinoff. And both have handily outperformed GE. An accomplishment which, let’s face it, isn’t saying much.
Given that Edward Garden — a founding partner of Nelson Peltz’s Trian Fund Management — now sits on GE’s board, this very model may already be under consideration. Many analysts expect that GE Healthcare — already set to be spun off — is the likeliest target for this sort of plan. But with Culp having recently split GE’s flagship Power unit into two divisions, it’s possible one of those, or the low-margin consumer lighting business, or the small renewable energy business, could be the unlucky recipient of the Chemours treatment.
Expect something drastic
Culp has been tight-lipped about whether he plans to take a different path than his predecessor, John Flannery, who was ousted by the board in October after just over a year at the helm, despite setting much of the current turnaround strategy in motion. There’s some speculation that he wasn’t moving fast enough to appease board members or shareholders. But since his departure, GE’s stock has continued its slide, and management seems no closer to figuring out how it’s going to right the ship.
For the Avengers, the glimmer of hope presented by Doctor Strange is enough to carry them through to another multimillion-dollar sequel. But I can’t say that the prospect of a Chemours-style gambit alone should be enough to induce investors to hang onto GE’s troubled stock. After all, there’s no guarantee that GE will choose a path that will enable it to prevail. Sometimes, real life ain’t like the movies.