Will GE bring good things to your portfolio?
General Electric (NYSE: GE) stock has fallen 40% in the near-decade since Jack Welch handed off the CEO slot to Jeff Immelt. Friday, GE reported earnings that beat expectations. Does this make GE a buy?
Jeff Immelt has been bad for GE shareholders -- especially when compared to Welch. As I wrote in 2006, Immelt earned a gentleman's C for his performance as CEO. That's because GE's stock was down 14% since Immelt took over during which time the S&P 500 rose 25%. And, as I noted then, Immelt's excuse was that Wall Street had the "blue chip blues."
This was a lame excuse -- since the stock of 3M Company (NYSE: MMM), another blue chip run by Immelt's GE-CEO-race-rival, Jim McNerney -- the subject of my book, You Can't Order Change, was up 45% under his tenure.
Meanwhile his predecessor oversaw nearly two decades of double-digit quarterly earnings growth and a massive boost in shareholder value. Under Welch, GE's market value increased 5,096%, inclusive of dividends, during Welch's 20 year tenure as CEO which began in 1981. This represents an average annual increase in GE's shareholder value of 21.3% a year. The S&P 500 increased 1,433% over the same period, or about 14.3% a year, also inclusive of dividends.
Is Immelt's leadership going to pay off for shareholders? Based on GE's second quarter earnings results, it looks like there is a bit of reason for optimism. Its profit was $3.69 billion -- up 22% from the year before, or 35 cents per share. On an adjusted basis, GE's second quarter EPS of 34 cents a share beat analysts' estimates by 6%. And GE's $35.63 billion in second quarter revenues were 2.7% higher than analysts expected.
GE is the largest conglomerate out there -- meaning it owns a grab-bag of businesses with fairly limited activity sharing among them. Back in July 2007, I met with GE's CFO and he asked me what GE could do to boost its shareholder value. My response was to sell everything except the infrastructure businesses -- like aircraft engines, energy, and locomotives -- where GE is selling to rapidly growing emerging markets and has a competitive advantage.
Such a move would entail dumping its other units -- including appliances, NBC, and financial services. To his credit, Immelt has partially sold NBC but has not been able to find a buyer for GE's appliances business. The part of GE that makes mortgages and issues credit cards is still sucking up too much capital.
Those infrastructure businesses performed well in the second quarter. For example, GE's strongest growth came its railroad locomotive unit, which posted a 74% rise in revenue following a long period of slow growth. Equipment orders climbed 33% as GE introduced more efficient wind and gas turbines, service orders rose 16% percent; and Infrastructure orders increased 24%.
In the last year, GE stock is up 26% compared to 23% for the Dow. Should you go along for the ride?
Here are two reasons to buy the stock:
The good news is that its balance sheet has been improving. Its cash has risen faster than its debt. Specifically, GE's cash has risen at a 54% annual rate from $14 billion (2009) to $79 billion (2010) while its debt was up at an 8.4% annual rate from $261 billion (2009) to $361 billion (2010).
With its low stock valuation and high dividend, it may be worth considering that after a decade, Jeff Immelt is figuring out how to manage GE. If GE keeps beating expectations, its stock could keep rising.
Jeff Immelt has been bad for GE shareholders -- especially when compared to Welch. As I wrote in 2006, Immelt earned a gentleman's C for his performance as CEO. That's because GE's stock was down 14% since Immelt took over during which time the S&P 500 rose 25%. And, as I noted then, Immelt's excuse was that Wall Street had the "blue chip blues."
This was a lame excuse -- since the stock of 3M Company (NYSE: MMM), another blue chip run by Immelt's GE-CEO-race-rival, Jim McNerney -- the subject of my book, You Can't Order Change, was up 45% under his tenure.
Meanwhile his predecessor oversaw nearly two decades of double-digit quarterly earnings growth and a massive boost in shareholder value. Under Welch, GE's market value increased 5,096%, inclusive of dividends, during Welch's 20 year tenure as CEO which began in 1981. This represents an average annual increase in GE's shareholder value of 21.3% a year. The S&P 500 increased 1,433% over the same period, or about 14.3% a year, also inclusive of dividends.
Is Immelt's leadership going to pay off for shareholders? Based on GE's second quarter earnings results, it looks like there is a bit of reason for optimism. Its profit was $3.69 billion -- up 22% from the year before, or 35 cents per share. On an adjusted basis, GE's second quarter EPS of 34 cents a share beat analysts' estimates by 6%. And GE's $35.63 billion in second quarter revenues were 2.7% higher than analysts expected.
GE is the largest conglomerate out there -- meaning it owns a grab-bag of businesses with fairly limited activity sharing among them. Back in July 2007, I met with GE's CFO and he asked me what GE could do to boost its shareholder value. My response was to sell everything except the infrastructure businesses -- like aircraft engines, energy, and locomotives -- where GE is selling to rapidly growing emerging markets and has a competitive advantage.
Such a move would entail dumping its other units -- including appliances, NBC, and financial services. To his credit, Immelt has partially sold NBC but has not been able to find a buyer for GE's appliances business. The part of GE that makes mortgages and issues credit cards is still sucking up too much capital.
Those infrastructure businesses performed well in the second quarter. For example, GE's strongest growth came its railroad locomotive unit, which posted a 74% rise in revenue following a long period of slow growth. Equipment orders climbed 33% as GE introduced more efficient wind and gas turbines, service orders rose 16% percent; and Infrastructure orders increased 24%.
In the last year, GE stock is up 26% compared to 23% for the Dow. Should you go along for the ride?
Here are two reasons to buy the stock:
- Low price. GE's price to earnings to growth ratio of 0.68 (where a PEG of 1.0 is considered fairly priced) means its stock is very expensive. GE's P/E is 15 and its earnings are expected to grow 22% to $1.67 in 2012.
- Dividend. GE's dividend yield of 3.13% is attractive and it's been growing at an average annual rate of 3.6% over the last year.
The good news is that its balance sheet has been improving. Its cash has risen faster than its debt. Specifically, GE's cash has risen at a 54% annual rate from $14 billion (2009) to $79 billion (2010) while its debt was up at an 8.4% annual rate from $261 billion (2009) to $361 billion (2010).
With its low stock valuation and high dividend, it may be worth considering that after a decade, Jeff Immelt is figuring out how to manage GE. If GE keeps beating expectations, its stock could keep rising.
posted by petercohan at 5:10 AM
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