Commentary: Two Cheers for GE
By Diane Brady
Rarely is a company's annual report so eagerly anticipated. In the wake of Chairman and CEO Jeffrey R. Immelt's threat to issue a report the size of a Manhattan phone book to dispel doubts about earnings, investors treated the latest tome from General Electric Co. (GE ) like the corporate equivalent of a Harry Potter book. For many, it held the promise of new numbers that would magically reveal the inner workings of its mysterious financial unit, General Electric Capital Services Inc.
With just 16 pages more than last year and 30% more content--thanks to smaller type--GE's 2001 report hasn't turned out to be the biceps-builder everyone expected. Still, the world's most valuable company has raised the bar for disclosure and opened itself to an unprecedented level of scrutiny. As Rob Plaza of Morningstar Inc. puts it: "If this was the way GE reported when I started covering the company, I would have understood it a lot sooner."
How so? For starters, GE broke out 26 businesses, up from 12 segments last year, and devoted a remarkable amount of attention to its accounting practices and its use of special-purpose entities that move assets off the balance sheet. In an attempt to bolster investors' faith about management's integrity and judgement, the report also explains GE's critical accounting policies. And in his opening comments, Immelt delved into topics such as managed earnings, a far cry from last year's celebratory note from outgoing Chairman John F. Welch.
Moreover, there are plenty of data that should help investors understand where GE's mammoth finance unit makes money. Indeed, in unveiling the true complexity and volatility of GE Capital, Immelt has driven home how different a beast that byzantine unit is from GE's industrial side. Under the old format, nobody would have known that GE Equity, the unit's investment arm, went from a $525 million profit to a $270 million loss last year. Or that GE made a "cash infusion" of $3 billion to its acquisition-hungry finance unit in 2001.
Bravo, Mr. Immelt. That all makes for a good start. But there's a long way to go. Now that the folks at GE have told investors where they make money, they should pry open the books to reveal how they make it. Investors need more than simply sales and earnings figures to really gauge the health of its businesses. Nobody reading this report would know the extent to which each business relies on acquisitions for growth, for example, or how much cost-cutting contributes to the bottom line. "It's not just Trivial Pursuit," says Sean Ryan of brokerage Fulcrum Global Partners. "A minimal amount of data could give us substantial insight into how they make money and where the risks lie."
GE says more data are to come, although it's not clear what exactly it will provide. But investors know what they need to get a better handle on the company's financial health. They would like to see a few key nuggets from each business such as pension income, investment losses, and the cost of goods sold. What's relevant may vary from business to business. Investment income is critical for the insurance units while research spending is more germane to, say, the appliances business. But the question remains the same. Knowing how much growth is coming from each of the company's core businesses--and what it cost to get that growth--would go a long way toward helping outsiders judge how sustainable it is. And GE shouldn't just make this an annual exercise. With advances in information technology, there's no reason GE can't break out results of each business in quarterly reports.
Nobody wants to wade through a phone book of factoids, and few investors want GE to waste the money or talent needed to produce one. The company says it is simply responding to what investors want. Now, GE needs to give them more of what they really need: solid information so they can better assess the company's quality of earnings.
Associate Editor Brady covers GE from New York.