Taking Jeffrey Immelt at His Word

GE's new CEO impressed analysts with his confident prediction of double-digit growth in 2002. Will investors be equally impressed?

By Diane Brady

Jeffrey Immelt knew it would be tough to replace the legendary Jack Welch as head of General Electric Co., but he wasn't expecting it to be this tough. On Immelt's third day as chairman and CEO, terrorists attacked the World Trade Center and the Pentagon. When the New York Stock Exchange reopened the following week, investors began unloading his stock. Within days, GE stock had dropped to around $30 a share -- about half the 52-week high and more than 20% lower than before the attacks.

The question now is whether the industrial multinational will rebound anytime soon. And for all the pummeling it has taken, the stock certainly seems to be on a promising path, having gained 3% after Immelt met with institutional investors on Sept. 21. It jumped an additional 13% to close at $35.50 by Sept. 25.

However, when the market is as volatile as it has been since the terrorist attacks, GE is usually among the more active blue chips. On Sept. 25, more than 44 million shares changed hands. As Todd Hinrichs, an analyst at ABN AMRO, points out: "People view GE as solid and steady, so they buy and sell it very easily."

From a business point of view, GE has cast the Sept. 11 tragedy as simply another chapter in what has already been a miserable year for its economy-sensitive businesses. The company began seeing signs of an industrial recession last fall. GE knew 2001 would be terrible, Immelt says, and 2002 now looks like it could be even worse -- a fear already reflected in projections.


  Immelt, who says he was deeply shaken and "incredibly sad" following the attacks, emphasizes that he can't predict the severity or length of the downturn. Barring even more tragic news or shocks to the system, though, he promises GE will still deliver its double-digit growth. At the very least, he says, it will outperform the market.

Nobody knows better than GE's new chairman that people will hold him to his word. Investors may have loved Welch, but they have relied even more on GE's uncanny predictability as a growth play. "I look at this as a growth stock," he says, "even though you may need glasses to see that today."

It's no help the company has a new management team and a roster of businesses particularly vulnerable to a severe economic downturn. For example, GE Aircraft Engines, which generates about $11 billion in annual sales, could lose $100 million in operating income this year, Immelt says, as airlines cut back service in the wake of the attacks. The company also leases aircraft through its GE Capital Aviation Services unit and expects to see some lost business there.

Add to that a reinsurance unit, which already has said it will post a $400 million aftertax loss this quarter because of the attacks. Then there are the various businesses that rely on a healthy economy, including NBC, appliances, and plastics. And don't even start on GE's heavy investments in the troubled economies of places like Japan.


  No wonder investors are uneasy. GE stock fell more than the 14% drop in the Dow Jones industrial average in the first week of trading after markets reopened. It was hardly a surprise that GE investors were more motivated to sell than buy. Insurers needed to cover claims, mutual-fund companies faced redemptions, and some investors simply wanted out. The highly liquid GE was an easy choice to dump.

In that light, the terrorist attacks certainly seem harmful to the $130 billion company's bottom line. GE recently announced that the tragedy would cause its reinsurance unit, which covered part of the World Trade Center and some of the hijacked planes, to post a $400 million aftertax loss. The Aircraft Engines division could lose $100 million in operating income this year and $200 million more in 2002. GE Capital Aviation Services, which leases aircraft, may lose $120 million in profits next year. An additional $100 million will vanish this year from the economically sensitive businesses, with NBC's lost ad revenues accounting for half that total.

Even so, orders at appliances and plastics have already bounced back to their pre-attack levels. And Immelt insists the company can still deliver an 11% rise in earnings this year, and double-digit growth in 2002. The terrorist attacks trimmed only four pennies per share off GE's 2001 earnings estimates, now set at $1.41 per share. Immelt argues that GE's other businesses can balance out any weak areas. Power Systems remains strong, with back orders through 2003, and the Medical Systems unit he used to head expects to increase earnings more than 20% next year.

GE Capital is also buzzing along and should see earnings rise 20% this year, despite the hits to insurance and aircraft leasing. Heavy cost-cutting and an undisclosed number of layoffs will help the company make its numbers. The new chief also noted that initiatives such as speeding up the spread of technology should improve productivity. He has told his people to reduce backroom operations by 70% within the next three years.


  So far, investors seem to be taking him at his word. Robert L. Meyer, president of Ehrlich Meyer Associates, walked away from the Sept. 21 meeting with renewed confidence in Immelt. "I felt he had a great command of the situation," says Meyer.

Others were even more effusive. James G. Bitter of Wilmington Trust Co., which counts GE as its largest holding after Dupont, was stunned to see the stock dip below $30 a share. "These guys don't walk on water, but they're close," he says. But even Bitter admits that the playing field has changed. "Maybe GE should sell between $40 and $50 now."

Immelt says he can't forecast that one, although he did tell investors that his stock looked like an incredible bargain at $31. Bear Stearns analyst John Inch believes it could easily head back to the $50-a-share range at the very least. Even more bearish observers, like Robert Friedman of Standard & Poor's, a sister company to BusinessWeek, acknowledged as the shares fell last week that "it's starting to get interesting." He wonders if there might be more downside for the stock, though, given the tough environment.

While this week's gains hardly restored GE to its glory days, the rapid fall and rise of stock in the world's most valuable company suggest that investors should continue to tread carefully. But for those who take Immelt at his word, GE probably isn't a stock to abandon at this stage of the game.

Brady covers GE and other companies for BusinessWeek in New York

Edited by Beth Belton