Welcome to the Frying Pan, Jeff

Can GE's Immelt deliver the double-digit returns he promised?

Tuesday, Sept. 11, was Jeffrey R. Immelt's third day as chairman and CEO of General Electric Co (GE ). Early that morning, before a planned address to Boeing Co. (BA ) engineers in Seattle, he was working out at his hotel when the TV over his StairMaster flashed the news about the World Trade Center attacks. Within minutes, Immelt was on the phone to GE headquarters in Fairfield, Conn., checking on employees (two died in the attacks) and dispatching GE's mobile generators and medical diagnostic equipment to the disaster scene. The next day, he made a $10 million company donation to the families of rescue workers lost in the buildings' collapse.

When the stock market reopened six days later, however, it was clear that the 45-year-old CEO was faced with yet another challenge: restoring GE's battered stock price. By week's end, investors had lopped more than 20% off GE shares, while the Dow Jones industrial index had slid only 14.3%. That took about $80 billion off GE's market cap and put the share price of the world's most valuable company at a level not seen since 1998.

Immelt already had the tough task of convincing the world that he was a worthy successor to the iconic Jack Welch. Now he also has to lead GE through dark and unpredictable times. Not only are customers and employees traumatized by the attacks, but many GE businesses--including jet engines, aircraft leasing, broadcasting, and reinsurance--will feel the pain. The company's Employers Reinsurance unit, for example, which provided coverage for some of the hijacked jets, already expects a $600 million pretax loss this year, while NBC is expected to take a $50 million hit to profits because of several days of ad-free coverage of the attacks.

Yet on Sept. 21, Immelt appeared before a group of investors and analysts in Manhattan with surprisingly good news. He promised that profits would grow by 11% this year and that he would deliver double-digit growth in 2002, compared with the usual 15% rate. That means earnings of $1.41 per share in 2001, or only 4 cents less than GE expected before the attacks--2 cents from insurance losses and a cent each from shrinking sales at aircraft engines and various economically sensitive businesses.

How would he do it? Immelt says strong growth in the company's power-systems, medical-systems, and capital-services units will compensate for weaker siblings. Mix those hot performers with an expected $400 million boost in military sales and the company's continual cost-cutting, he argued, and GE will do well. Even NBC is expected to get a $600 million revenue boost from the Salt Lake City Olympics next year. As Immelt puts it: "All of our business plans were based on there being an economic slowdown through 2002.

JAPANESE EXPOSURE. Nevertheless, it won't be quite that easy. GE probably can count on top-notch performances from its strongest units, Power Systems and Medical Systems, which should easily increase earnings next year, by more than 20%, thanks to strong orders and new products. Together, they should account for about a third of GE's operating income. But GE Capital Services, the company's finance arm that contributes about 40% of income, is another matter. Robert Friedman, an analyst at Standard & Poor's Corp. (a sister company of BusinessWeek) is skeptical that the unit can deliver the promised 20% earnings growth. Not only does GE face tough times in its aircraft leasing unit and the overall economy, it has to cope with Japan's poor economy, where it has consumer and business-finance activities. Immelt counters that there are bright spots. Lower interest rates should aid financing activities, while lower equity prices may fuel more acquisitions for GE Capital. But he can't let that unit get so big it reshapes GE's image as a well-diversified company.

So far, investors seem to agree with Immelt's optimistic outlook. GE stock rose 3% on Sept. 21, despite another down day for the market, and jumped more than 13% to close at $35.50 on Sept. 25. It helped that the new chief gave a more detailed analysis of the numbers than Welch normally did. GE's sheer breadth of business is a buffer against bad times. In total, the attacks were projected to trim only several hundred million dollars off the bottom line of a company that racked up $130 billion in sales and $12.7 billion in profits last year. And GE's costs were already shrinking. Ongoing efforts in all its divisions to put more operations online should save about $1.5 billion annually, it says. Meanwhile, GE has already trimmed about 30,000 workers from its payroll this year.

But even if Immelt keeps the company strong in a sour economy, GE's share price may have a hard time keeping up. Before the attacks, it already was down one-third from its 52-week high because of a slumping economy and skittishness about a GE without Welch. Also, the Sept. 11 attacks showed up the nature of GE stock: Its 10 billion shares are liquid, widely held, and easy to dump. Many shareholders--including insurers paying out claims and mutual funds covering redemptions--did just that.

"UNPRONE TO GOOFING." Even many of those who held on to their shares are not betting on a rapid rise anytime soon. "We're all trying to figure out what kind of risk premium GE should sell for," says Robert L. Meyer, president of investment firm Ehrlich Meyer Associates Inc. "In this market, I don't think we'll see the kinds of multiples it used to get." Immelt can joke about that, saying that he still regards GE as a growth stock, "though you may need glasses to see that today." On Sept. 18, Immelt bought 25,000 GE shares at $35.11 each. And Chief Financial Officer Keith S. Sherin says that GE's recently accelerated $3 billion-a-year stock-buyback program made him empathize with Japan's efforts to prop up the yen.

Immelt's confidence, nevertheless, pleased most investors, as did his openness and details about the problems ahead. As Immelt explains: "When there is a lot of uncertainty, it's important to bring people back to what's actually going on." That's already a break with the Welch regime where, some say, you were scared to blink in case you missed a chart. This time, everyone got a bound copy of statistics and growth projections. One investor even mentioned it, prompting some applause. "I expected a vague `rah-rah, GE,' touchy-feely kind of thing," says James G. Bitter, vice-president of asset management at Wilmington Trust Co. "I think Jeff today will be as unprone to goofing up as Welch was after 20 years."

Immelt already is putting his own twist on the top job. Gone is the intimidating bluster that characterized the Welch regime--though the top brass is still tight-lipped about such sensitive issues as future layoffs. Immelt wouldn't estimate any layoffs attributable to the attacks, although he did say the aircraft-engine unit would save $500 million through layoffs and other cost cuts. In his Sept. 21 meeting, Immelt paced across the stage like a coach outlining moves before a big game, calling out to several audience members by name. Immelt spoke of the uncertainty ahead. But he also spoke of GE's ability to win. "Probably the only good thing about the last few weeks," he says, "is that I don't get asked about Jack anymore."

There are surely tough times ahead for GE in the next two years. Immelt seems to have convinced investors that GE will survive the recent events, although he admits he was shaken. "Not much scared me before Tuesday [Sept. 11]," he says. When it comes to GE, at least, he's not afraid of the future.

By Diane Brady in New York

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