Table: Why Bill Gross Is Down on GE
TOO MANY ACQUISITIONS
GE (GE ) relies heavily on acquisitions--financed with stock and short-term debt--for its growth. The strategy leaves it vulnerable to volatile markets and shifts in investor confidence--and makes for lower quality of earnings than if growth came from innovation and improved productivity.
GE'S RESPONSE: Only 15% of earnings growth came from acquisitions last year, while most came from core businesses. It rarely uses stock, and commercial paper is only used as interim financing.
TOO MUCH SHORT-TERM DEBT
GE's $103 billion in outstanding commercial paper is nearly three times what its bank lines cover. Relying too much on short-term IOUs is cheap but leaves GE subject to interest-rate swings.
GE'S RESPONSE: The excess short-term debt stemmed from bond market turmoil post-September 11. The company is now increasing bank lines and trimming its share of commercial paper. It also has other sources of liquidity.
TOO MUCH LEVERAGE
GE Capital uses "near-hedge-fund leverage" to help generate returns. Without the benefit of that leverage, the company's growth rates would be in line with "a failed conglomerate of yesteryear."
GE'S RESPONSE: GE Capital's leverage has been consistent for years and is appropriate for a finance company. Moreover, it has the support of rating agencies. The industrial side of GE has a tiny $2.5 billion in debt.
NOT ENOUGH DISCLOSURE
GE still doesn't disclose enough to judge whether earnings are high-quality
and sustainable, and management is unresponsive. Gross wants the performance of individual units, and the impact of acquisitions, broken out better.
GE'S RESPONSE: Gross himself has called GE one of the highest-quality companies in the world. GE has improved disclosure under Immelt and continues to do so. It's constantly in touch with investors and creditors.