Two Dinosaurs Of The Dow Are Roaring Back To Life

Once considered the crown jewels of the blue chip index, GE and IBM were left for dead after years of managerial missteps. But these old giants are shaking off the rust, and are reclaiming ground lost a decade ago.

With all eyes glued to the Magnificent Seven megatech stocks, GE and IBM – formerly the bluest of blue chips – are sneaking back up the charts, shaking off a decade’s worth of rust.

Back at the dawn of the 2000s, GE and IBM were still occupying top spots on Forbes’ rankings of the largest companies on the planet. General Electric, an original Dow member in 1896, was a strong diversified conglomerate expanding through the dotcom craze, gobbling up businesses ranging from NBC to Kidder Peabody. By the time its iconic longtime chief executive Jack Welch retired in 2001, its market cap had reached more than $600 billion. International Business Machines, a bit of a latecomer to the index in 1932, was America’s most valuable corporation through much of the 1970s and 80s. During the 1970’s and 80s its market cap ranged from $22.35 billion in September of 1974 to $105.9 billion in August of 1987, two months ahead of the Black Monday stock market crash.

However these giants of the 20th century ran into trouble in the new millennium. General Electric’s massive, highly leveraged GE Capital, including a large portfolio of subprime loans, was brought to its knees during the financial crisis and eventually dismantled and sold off. Moreover, a new generation of technology companies soon outpaced these blue chips in a host of markets including cloud computing.

Now, more than two decades from their peak years, GE and IBM are crafting their own comeback tales. Booted from the Dow in 2018 after a marathon 111-year run, GE is flirting with its highest post-financial crisis stock price, eager to leave a seven-year slump in the dust. IBM is on a similar trajectory, creeping up on a stock peak it last saw over a decade ago. In the rough patch from 2016 to 2018, GE’s shares took a 75% nosedive, and IBM wasn’t faring much better, with a 32% drop, all while the Dow ticked up by 18%. Fast forward, and the tables have turned: GE’s value has tripled since 2018, and IBM’s has surged 82%, both outstripping the Dow’s 67% increase.

Are these two dinosaurs of the Dow seeing a fleeting resurgence or are they beginning a steady ascent back to prominence?

The boost in GE and IBM’s stock prices isn’t as straightforward as their financials suggest. Sure, more robust bottom lines paint a pretty picture and could easily explain their surging shares. Yet, the reality is more nuanced. GE, for instance, reported a $799 million loss in 2022 but bounced back with a $10.2 billion profit in 2023, a hefty chunk of which came from the $5.6 billion windfall from spinning off its healthcare unit. IBM had its own struggles, absorbing a $5.9 billion blow in 2022 to shed $16 billion in pension liabilities to Met Life and Prudential. Yet, by 2023, its profits had climbed by nearly $2 billion on a GAAP basis.

Big Blue

Chilton Investment Company, a multi-strategy investment firm based in Stamford, Connecticut with over $1 billion in assets under management, invested roughly $50 million in IBM during the second quarter of 2023 when shares traded around $130, according to a regulatory filing. They’ve been buyers in each subsequent quarter. Since their initial purchase, IBM’s stock has jumped 50%.

Jennifer Foster, co-chief investment officer at Chilton since 2016, noted the longstanding skepticism about IBM’s ability to revive revenue growth kept many other investors away. Between 2011 and 2020, the company’s annual sales halved from $107 billion to $55 billion, a result of failing to stake its claim during the cloud computing gold rush that changed the fates of Amazon, Alphabet, and Microsoft. IBM’s share in the data processing and hosting services market crashed. From controlling 11% of the market in 2019—nearly double that of its closest competitor at the time, Salesforce—it dropped to a 6.9% share in 2023. That’s still good for first place, but leaves it just barely ahead of Amazon – for now, according to data from IBISWorld.

As its market dominance began to wane, so too did morale at IBM’s headquarters in Armonk, New York. The company’s rating on Glassdoor, the site that lets employees rate their employers, was a 3.6 out of five at the end of 2018. Today it stands at 4.1, ahead of tech heavyweights like Meta and Oracle, and tied with Salesforce. That change is visible even to outsiders. Foster’s curiosity in IBM stock was piqued after a friend shared insights from attending the firm’s 2023 Think conference in Orlando.

“We got involved in the stock because a very good friend who is an excellent technology investor was at the IBM Think conference last year,” says Foster. “Her comment to me after she went was that ‘the people that work at IBM are just standing a little taller than normal.’ Which I thought was just an interesting comment. I followed the stock for years and years but we’ve not ever invested in the long side because we couldn’t get confident that the revenue was going to start to grow.”

Asked about Foster’s comment, James Kavanaugh, IBM’s chief financial officer, said the more upbeat outlook was measurable.

“You can see the overall sentiment shift from an investor perspective, a client perspective, and in our employee engagement scores,” says Kavanaugh. “They’re all reflecting a more positive outlook. We’re a fundamentally different company and there’s lots of momentum.”

The big turning point for revenue growth, according to Foster, came with the $34 billion acquisition of Red Hat in 2019. Red Hat, known for its open-source cloud data management platform, has helped boost IBM’s software revenue from $18.5 billion in 2018 to $26.3 billion last year. But more than that, the move also paved the way for Arvind Krishna’s ascent to chief executive officer.

“A lot of people, including myself, were skeptical about the Red Hat deal,” says Foster. “Did they pay too much? Was it a smart deal? But it started to show good traction with IBM pretty quickly. And then in 2020 the board appointed Arvind Krishna as the CEO of IBM. Arvind was the architect of the Red Hat deal. And I think some of that may have gotten lost in the Covid confusion of the day. Arvind Krishna is an interesting guy because he’s been at IBM for a long time, but he’s a technologist.”

Krishna, who has a doctorate in electrical engineering from the University of Illinois, was the senior vice president and director of IBM Research where he managed three thousand scientists spread out across the company’s then 12 research laboratories. Prior to Krishna, most of IBM’s chief executives have had sales or business backgrounds, even if they were trained engineers. Tom Watson himself came up in the sales side of the business. John Akers, Lou Gerstner and Sam Palmisano were professional managers, and even Ginni Rometty, who was a systems engineer with a degree in computer science, cut her teeth on the consulting side of the business. “[Krishna] understood the Red Hat strategy and what Red Hat could bring to IBM,” says Foster. “What it brought was a modern operating system that IBM needed. Red Hat brought IBM relevance.”

IBM’s Kavanaugh explained the Red Hat deal as a bet that cloud computing’s landscape would dramatically shift once the initial land grab subsided. IBM was playing the long game, waiting for businesses and the market to align with the vision they saw as inevitable.

“IBM Blue and Red Hat red were better together,” says Kavanaugh. “When you dial back to the middle of 2018 when we announced the acquisition, we were arguably just five years into the first phase of the cloud expansion. The world was moving to the public cloud. AWS, Microsoft, Google, they were going to be the winners. We had a different point of view. We thought the world would be multi-cloud, with enterprises using multiple service providers. They’d need someone like Red Hat to manage that infrastructure. If you look now, the world is multi-cloud.”

Moshe Katri, a Wedbush Securities analyst tracking IBM, holds a more reserved view on the Red Hat acquisition and IBM’s future. He’s kept a neutral rating on the stock, setting a price target of $140—25% below its current trading price. Katri says that since the acquisition, Red Hat’s growth has decelerated, but noted that its contribution to persistent revenue appeals to investors.

“This is not a hyper-growth story,” says Katri. “IBM is still a low to mid-single digit growth company.

Simply achieving steady revenue growth could be sufficient to sustain IBM’s stock momentum, especially given the stock’s 3.4% dividend yield. As for the company’s next catalyst, IBM CFO Kavanaugh had a quick response: “Gen AI, Gen AI, and Gen AI. The second thing though is that we’ve been investing in and have a first mover advantage when it comes to quantum computing.”

General Electric

If IBM’s story is about addition, GE’s is all about subtraction.

Larry Culp, who became GE’s first outsider CEO in October 2018, has been methodically reversing his predecessors’ acquisitions, trimming GE through asset sales and a bold plan to split the conglomerate into three distinct entities. Culp’s aggressive strategy aims to sculpt GE into a form it’s arguably never assumed before: lean and focused.

GE’s ditched show-off purchases for smart sell-offs to tackle a giant debt pile. Comparing GE’s old and new debt levels is tricky because of GE Capital’s big shadow (the financial unit was mostly dismantled around 2015), but the numbers are staggering: debt is down from $500 billion-plus in 2009 (for context, that’s about the size of Turkey’s current national debt) to a manageable $23 billion today.

The future GE will zero in exclusively on aerospace and defense. Its biopharma division was sold to Danaher, which CEO Larry Culp previously led from 2000 to 2014, for $20 billion in 2020. Its healthcare unit was spun-out in 2023, while the energy segment, rebranded as GE Vernova, is set to trade as its own stock come April 2nd.

According to Ken Herbert, an aerospace analyst at RBC Capital Markets, the stage is set for GE’s aerospace business – which will trade under the GE ticker – to thrive. Herbert currently has the company as a “buy” with a $180 price target.

“They’re creating a pure play, large cap aerospace and defense stock at a time when there’s a shortage of quality options out there,” says Herbert. “The aerospace services market has been on fire. People are flying more while other engine manufacturers are experiencing delays in delivering parts for new engines. There’s a real premium being placed on older legacy engines at airlines. That plays right into GE’s sweet spot. GE aerospace is clicking on all cylinders while its competitors are struggling.”

But while GE’s stock is surging, lending support for Culp’s decision to cut the company into pieces, skeptics remain.

Georges Ugeux, the founder of Galileo Global Advisors, a corporate strategy consultancy, and former managing director of Europe for GE’s old Kidder, Peabody & Co. investment bank, thinks it’s not clear yet whether the company’s dismantling strategy will be worth it in the long run.

“Splitting companies is surgery,” says Ugeux. “Surgery has high costs, it creates pain. Unless you have a very good reason to do it, you should avoid it. But it’s one of the biggest games investment bankers play. Culp was listening to the bankers.”

For Ugeux, GE’s recent upswing is a rebound from a dismal 2022, when its annual EBITDA on a GAAP basis hit the lowest mark since 1985.

“The growth in share price was a normal reaction to 2022 being bad. It was results driven, but they kept the 20 times price-to-earnings multiple, it was just applied to better numbers. The question I have now is if I buy GE stock and I’m going to have a piece of all these other businesses after the splits and sales, will it be worth more or less than GE is now? 2022 was a bad year heavily affected by restructuring costs. 2023 was a recovery year. In 2024, we’ll see what they can do.”

RBC’s Herbert suggests GE might soon pivot back to acquisitions or begin returning capital to shareholders through buybacks or increased dividends. GE currently pays a dividend of $0.08 per quarter yielding 0.19% annually. Following the spin-off of its energy unit in April, he anticipates GE’s focus will shift towards strategic ‘capital allocation.’

“What are they going to do with all of that cash?,” says Herbert. “You could see a consolidation period, but Larry Culp and the management team will have some arrows in the quiver.”