GE Beating S&P Is Profit Goal as Immelt Decade Skirts Abyss
Jeffrey Immelt, saying he holds few regrets after leading General Electric Co. (GE) in 10 years bracketed by terrorism and a nuclear meltdown, predicts a payoff through 2013 as reinvigorated industrial units expand globally.
“Through all the volatility, we still focused on some big things and, I think, got them right,” Immelt said of a tenure as chairman and chief executive officer begun four days before the Sept. 11 attacks. A key goal in the next two years is profit growth that beats the Standard & Poor’s 500 Index, he said in an interview. “We feel like we can deliver for investors.”
Those investors saw the stock slide 60 percent to less than $16, the first dividend cut since 1938 and the loss of a AAA credit rating amid what Immelt calls “black-swan events” that included two recessions. The fourth-longest serving CEO among companies in the Dow Jones Industrial Average, he reshaped GE by focusing on energy, health care and transportation while selling divisions that once created 40 percent of sales. Immelt and directors say the result is a GE with less risk, able to thrive in emerging markets and at home.
As Immelt enters his second decade as boss, shareholders from Warren Buffett, who invested $3 billion in 2008, to the individuals who own 46 percent of GE must decide if a world economy roiled by Middle East uprisings and sovereign-debt crises will produce the growth the Fairfield, Connecticut-based company needs to prosper.
“In my personal opinion, at $16, it’s an incredible opportunity, especially if you believe now is a good time to invest,” said Lawrence D. Fink, the CEO of BlackRock Inc. and GE’s third-biggest shareholder. “If you think global GDP is going to collapse, GE, along with most companies, will not fare well in that. But GE is very well-positioned.”
Immelt sold some of the businesses, including plastics, insurance and the NBCU media unit, that he inherited from Jack Welch, the predecessor he calls “an enormously famous guy who was a great CEO.” Immelt pared the GE Capital finance arm as a global financial crisis escalated in 2008 and 2009.
He pushed an expansion that now brings about 60 percent of sales from overseas, up from 35 percent when he started. In the past five years, he tripled research and development spending to 6 percent of non-finance revenue.
In the process, Immelt acquired about $115 billion in assets and received $97 billion from those he sold -- the most combined activity of any public company, data compiled by Bloomberg shows. GE now holds $91 billion in cash on its balance sheet, including more than $77 billion at GE Capital as the company refinances long-term debt.
‘Seduced’ by Finance
Investors including Peter Sorrentino question whether those decisions took too long, such as in selling NBCU or targeting GE Capital to produce about a third of profit, down from about half in 2006. While the finance arm spurred earnings growth, it also exposed GE to market risks.
“His mistake was that he got seduced by GE Capital,” said Sorrentino, a senior portfolio manager in Cincinnati at Huntington Asset Advisors, which held about 2 million GE shares as of June. “It was like crack. They couldn’t live without it.”
Immelt, in the Aug. 30 interview, says that while he has “no regrets” about the businesses he jettisoned, he did let GE Capital get too big. “We didn’t test it hard enough, we didn’t probe it hard enough,” he said. “You don’t do a job like this for 10 years without making mistakes.”
Sorrentino counts himself as a grudging buyer of GE, which slid 51 cents, or 3.2 percent, to $15.25 at 4 p.m. in New York Stock Exchange composite trading as U.S. stocks fell. That’s down from $39.66 the day Immelt took charge. GE’s 60 percent drop through Sept. 2 compares with an 8.1 percent gain in the S&P 500 in that time.
“It pains me, but there are parts of the business they are the world’s best at,” Sorrentino said. A stock that was too lofty late in the Welch era at 59 times earnings is now undervalued, he said. GE’s PE ratio was 12.2 as of Sept. 2.
Buffett bet GE had value at $22.25 a share, a price the stock hasn’t touched again since he invested $3 billion in October 2008 to show confidence in GE as global credit markets tightened. GE agreed to pay Buffett’s Berkshire Hathaway Inc. a 10 percent dividend on the preferred shares he bought and is scheduled to buy them back next month. Buffett, 81, didn’t respond to a request for comment.
The stock’s nadir was during the global financial crisis on March 4, 2009, when GE sank to $5.73 in intraday trading and the company was “staring into the abyss,” said Deane Dray, a New York-based analyst with Citigroup Inc. who rates GE a “buy.”
‘Feast of the Bears’
“There was a feast of the bears circling around saying that this was the next Lehman Brothers,” Dray said.
That wasn’t the case last month, when markets roiled on concern about U.S. and European debt burdens. The Standard & Poor’s 500 index alternated declines and gains of more than 4 percent for four straight days. This time, while GE declined along with the markets, the feasting bears were kept at bay.
“We’ve raised a massive cash balance,” Chief Financial Officer Keith Sherin said in an interview. “Everyone looks at it and says why are you carrying so much cash? Well, I didn’t lose one minute of sleep during August.”
Short-sale bets against GE amounted to 0.5 percent of its shares as of Aug. 26, putting the stock in the bottom quintile in the S&P 500 and below the 3 percent average in the index, according to Data Explorers, a New York-based research firm.
While GE’s board is always aware of the share price, that can’t be the main concern, Ralph Larsen, its presiding director and former CEO of Johnson & Johnson, said in an interview. “You make bad decisions that way,” he said.
“As big and sturdy as GE is, we can’t take anything for granted,” Larsen said. “There is no such thing as a company that is too big to fail in today’s world.”
GE executives point to other benefits over the decade: $87 billion in dividends even with the cut, and about $161 billion in earnings, trailing only Exxon Mobil Corp. and Royal Dutch Shell Plc. The industrial businesses have a $189 billion backlog of equipment and service orders.
The accomplishments equate to changing the tires on a moving car, said Shelly Lazarus, the first director appointed after Immelt was given the nod to succeed Welch.
“I don’t think he gets enough credit for the amount of change that he brought about and yet at the same time, keeping the culture, keeping the values,” said Lazarus, chairman of Ogilvy & Mather Worldwide and head of GE’s new risk committee.
GE Capital meanwhile is selling or winding down about $80 billion in assets and will shift those resources to areas it’s keeping, such as aircraft leasing, energy financing and middle- market lending. The shrinking is a year ahead of schedule. Investors tend to reward industrial companies with higher PE ratios than finance firms.
“What investors mainly want is to grow the industrial earnings and have GE Capital be a much lesser portion,” said Robert Spremulli, a managing director and equity analyst at TIAA-CREF, which owns more than 58 million GE shares.
GE Capital isn’t planning a move such as cleaving off a minority stake and the units it has kept, save real estate, are performing at 2007 levels, Michael Neal, the finance arm’s chief executive, said in an interview.
“We just need real estate to come back around, and it will,” he said.
GE also is deep into its global expansion. The company in January transferred Vice Chairman John Rice to Hong Kong to oversee markets like China, India, the Middle East and Brazil and is assigning some of its fastest-rising executives to the initiative. Rice says GE products mesh with what developing nations need to meet basic needs, one of the issues he says contributes to upheaval in North Africa and the Middle East.
“People just didn’t feel like their lives were getting better,” Rice said in an interview. “How many hours in a day are the lights on? Is there clean water?”
While the expansion includes building factories both overseas and at home, Immelt says GE exports from the U.S. may triple this year from $7 billion in 2001. He says that has helped maintain jobs as sales of large gas turbines at home dropped from more than 200 when he started to about 3 this year.
“If we hadn’t globalized the company, that’s tens of thousands of jobs that would be lost in the United States, and a horrible company in between,” Immelt said. GE has announced 8,000 U.S. jobs since 2009, with 7,000 in manufacturing. Worldwide employment was 287,000 last year, down from 310,000 in 2001. The company plans to hire 15,000 this year including replacements for workers who left.
Immelt was criticized by bloggers and some members of Congress from both parties for expanding overseas while agreeing to lead a new panel on jobs and competitiveness for President Barack Obama. Deciding to serve was the right call, said James W. McNerney, Immelt’s friend, one-time rival for GE’s top job, and now customer as the CEO of Boeing Co. (BA)
“You know you’re going to catch some of this flak,” said McNerney, who himself agreed to lead Obama’s export council. “But you do it anyway, because constructive engagement is just a higher order than sitting on the sidelines carping.”
Immelt, a Republican, says he has no higher political ambitions. “I want to generate a lot of earnings and cash in this company and I want investors to benefit,” he said.
GE may earn $1.39 a share this year and $1.62 in 2012, based on average estimates of analysts surveyed by Bloomberg.
If history is a guide, Immelt may have 5 to 10 years left to achieve his goals. The average CEO tenure at GE is about 14 years -- more than twice the average for S&P 500 companies in 2010, according to executive consulting firm SpencerStuart. Welch, who declined to be interviewed, served two decades.
While emergency plans are in place, the succession process is years from naming final candidates to replace Immelt, said Susan Peters, who runs GE’s executive development programs.
Immelt, whose $3.3 million salary is unchanged since 2005 and whose $4 million bonus last year was his first since 2007, works without a contract and said he remains “paranoid every day.” He declined to discuss GE’s deliberations on succession.
“I’ve seen more than most CEOs are probably going to see in their lifetimes,” Immelt said. “If something happened to me tonight, I would look at GE in 2011 in better shape than where I thought we were in 2001.”
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