GE's Lost Decade
Jeffrey Immelt won one of corporate America’s top prizes 12 years ago when he was chosen to succeed industry legend Jack Welch as chief executive officer of General Electric. The glow didn’t last: He assumed his post just four days before Sept. 11. In 2008 the economic crisis sent the stock plunging, as investors worried that financing unit GE Capital would bring down the entire company. Five years later the economy is recovering, and the market is regularly setting new records. While GE shares have quadrupled since their low, they are still 33 percent below their price when Immelt took over. Including dividends, investors have a total return of zero under Immelt’s reign. The Standard & Poor’s 500-stock index has returned 110 percent in that time.
Immelt’s stated strategy is to reduce the size of GE Capital—in November, GE said it would spin off the division’s North American consumer-finance unit—and focus on industrial lines of business including oil and gas equipment, power generation, and aviation. JPMorgan Chase analysts Stephen Tusa and Drew Pierson recently expressed doubt that the shift would be enough to revive the stock. “We continue to see more attractive stories in the sector,” they wrote in a note to clients. Shares of GE rivals such as Danaher, Honeywell, and United Technologies are at or near all-time highs.
Ivan Feinseth, chief investment officer of Tigress Financial Partners, faults Immelt for agreeing to sell NBCUniversal “at the bottom”—in 2009, when media stocks were out of favor. After getting regulatory approval, Comcast bought 51 percent of the broadcaster in 2011 and the rest earlier this year. Feinseth notes that Comcast and Walt Disney, the parent of ABC, are setting fresh highs now that media stocks have recovered. Brian Langenberg, director of research at Langenberg & Co., says Immelt’s strategy is defensive, not a path to faster growth. “GE isn’t reducing finance because it has a new religious attachment to industrial,” he says. “This is about reducing the potential for future pain.”
Despite such criticism, it’s hard to find anyone on Wall Street calling for Immelt to step down, and no activist investors have targeted the company. Nor are shareholders showing displeasure. In April they rejected a proposal from the American Federation of State, County and Municipal Employees’ pension plan to split the roles of chairman and chief executive, titles currently held by Immelt. The company’s slate of 17 directors, including Mary Shapiro, former head of the U.S. Securities and Exchange Commission, were all re-elected. GE’s three biggest shareholders are money managers that specialize in index funds and ETFs: BlackRock, Vanguard, and State Street. Those companies control a total of about 15 percent of the stock.
While size might once have been a deterrent—GE had a market value of almost $280 billion on Dec. 2—activists have taken shots at both Microsoft ($320 billion) and Apple ($510 billion). Microsoft CEO Steve Ballmer announced his retirement four months after Jeffery Ubben of ValueAct Capital Partners disclosed a stake of less than 1 percent in the company. In September, ValueAct President G. Mason Morfit was given a seat on the Microsoft board. Carl Icahn has invested about $1 billion in Apple and said in August he wants the company to increase its buyback program to boost the share price.
One obstacle to outside agitators, says Feinseth, is GE’s complexity—300,000 workers spread across eight divisions in 160 countries. “If you have five activists going after GE and put them in the same room,” he says, “I’m sure you’d have at least 20 different recommendations. There are so many moving parts. Which division would you tackle first?” Also, says Feinseth, GE “is not a natural activist situation where you have so much obvious excess cash to chase like at Apple or Microsoft.” Instead of hoarding cash, GE has paid out $100 billion in dividends under Immelt and spent $50 billion to buy back its own shares. Still, investors are not excited: The stock trades at 15 times expected 2014 earnings, while Danaher has a price-earnings ratio of 20 and 3M trades at 18.
Seth Martin, a company spokesman, defends Immelt, citing his early decision to expand the aviation business. GE recently announced $40 billion of orders and commitments for aviation gear at the Dubai Airshow. “GE has an investor-friendly strategy to reduce the size of GE Capital and invest in our core industrial business,” says Martin. “Over the last 12 years, GE has transformed into the largest and most profitable infrastructure company in the world.” Martin points to a recent Deutsche Bank report that said the stock could jump 20 percent in a year. Immelt declined to comment.
William Smith, president of New York’s SAM Advisors, has given up on GE. The money manager, who agitated unsuccessfully for a breakup of Citigroup in 2006 and 2007, accumulated shares of GE over the past few years, hoping management would move aggressively to boost the stock. Smith says he has no appetite for a shareholder battle. Instead, he recently voted with his feet, selling his entire position. “I just threw up my arms and said ‘screw it,’ ” he says. “GE has not been well managed at all.”