We Like Culp as New CEO of GE

Joshua Aguilar: While we were certainly not expecting the firing of GE's John Flannery this morning, one thing we're not surprised by is the selection of Larry Culp. Culp is the individual we had in mind to replace Flannery in case the board was not pleased with Flannery's progress, as we indicated in a June note. We think the board is sending a signal to the market that everyone will be held accountable, even the CEO. Our take is that the board was frustrated with Flannery's lack of progress with taking cost out in the power division. GE was consistently targeting a return to 10% segment profit margins for the segment, but segment profits margins have hovered at about 4.7% over the past two quarters and sustained similar levels during 2017.

We like the choice of Larry Culp. Under his leadership, Danaher's stock rose five-fold in Culp's 14 years at the helm. While we were previously cautiously optimistic during Flannery's 14 months in charge of GE, we like that the board is going in a new direction with fresh new ideas. We don't anticipate that Culp will radically depart from the focus on aviation, power, and renewable energy. This is the same board that ultimately approved of the end of June 8-k filing this year.

That said, we would not be surprised in different changes in execution. For example, Culp is responsible for helping implement the Danaher Business System, which helped marry planning and execution at his former firm. One key takeaway is buy-in was a huge lever for the success of the operating philosophy's implementation at Danaher. Culp will need that buy-in from the heads of GE's power units.

Also, one thing we're hearing is GECAS is potentially being floated around for sale, with suitors like Singapore's Sovereign Wealth Fund. If GE can pull off a composite deal where it can clear off some of its legacy liabilities, we would back the deal, particularly since GECAS is at its potential peak with cheaper financing from its Chinese competitors.

Finally, we're not surprised by continued weakness at power and believe the $23 billion impairment charge is likely related to Alstom. No matter who is in charge, we still expect this to be a multiyear turnaround for the firm. That said, we believe the market overreacted to news that Exelon had to down four of its gas turbines due to oxidation issues (three of which were out of precaution). These are back online now, from our understanding. We think slashing price targets by 9% to 19% is an overreaction to this type of news.