GE: Not Too Big to Bounce

Does this extraordinary disruption in the capital markets make my stock look fat?

That question has to be bothering General Electric (NYSE: GE  ) shareholders today, as the stock continues to bounce around its five-year low. Weighing it at a robust $260 billion-plus in market cap, GE's very size suggests that it could have a tough time fulfilling its routine promises of year-over-year double-digit profits growth. Still more important to shareholders, the company's size makes it difficult to imagine the stock price resuming its upward rise of yester-decade.

So is it time to dump the stock and downsize to something with a bit more room to grow? Hardly.

You can glean evidence of GE's potential from the actions of some of the nation's best investors. One rising star, the Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) -esque Markel (NYSE: MKL  ) , has made GE its second-largest portfolio position. That's not the reason I recommended GE on Motley Fool CAPS, of course, but it does reinforce my own thinking -- which basically goes like this:

GE is profitable
GE's financial arm suffered a setback from the aforementioned "extraordinary disruption in the capital markets" last quarter, no doubt. But if you pull back from the quarterly view and take a gander at GE in its entirety for all of last year, I think you'll see something amazing. The whole idea of conglomerates like GE and similar megacorps such as Citigroup (NYSE: C  ) , Philips, or Siemens (NYSE: SI  ) is that they're internally diversified. When one segment hits a rough patch, the company can count on the others to pull the laggard over the hump.

But at GE, all six of the company's major divisions pull their own weight -- and they rake in operating margins in the mid-teens or higher.

GE is growing
So GE's existing businesses are profitable. But what's the company doing to grow those profits? Let me just sketch out for you a few of the GE business lines that I expect will produce beaucoup profits in our globally warming, oil-depleted world:

  • Water: GE is No. 2 in the quickly rising field of water treatment, and it's working hard to grow toward No. 1, through projects such as opening Africa's largest seawater desalinization plant.
  • Nuclear: It's a race to see which we can use up faster -- fresh drinking water, or oily sludge. Whether we've reached the tipping point already, I do not know. But one thing's for sure: I don't see many dinosaurs dying and getting squished into goo these days, so chances are we're pulling more oil (and gas and coal, for that matter) out of the ground than we're putting back into it. And GE is one of the leaders in that most atomic of alternative-energy sources.
  • Wind: GE's also placating folks with a fear of energy sources that cause babies to glow green. If nuclear's not your bag, then GE's just as happy to sell you some windmill parts. The company's already among the world's largest vendors of wind turbines.

Sure, it may take some time for these businesses to grow to a size worthy of GE. But while we wait for the inevitable to become actual, GE's paying a tidy 4.6% dividend for our patience.

GE is cheap
Now wrap all that up in a stock with a beaten-down share price, a AAA-rated balance sheet, and growth expected at 11% per year over the next half-decade. What's that tell you?

GE's not fat. It's just big-boned.

If you agree, then head on over to Motley Fool CAPS, and say a few kind words about GE.

Fool contributor Rich Smith does not own shares of any company named above. You can find Rich on CAPS, pontificating under the handle TMFDitty, where he's ranked No. 1,926 out of more than 110,000 players. Berkshire Hathaway is a recommendation of both Stock Advisor and Inside Value. The Motley Fool owns shares of Berkshire Hathaway. The Fool has a disclosure policy.


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  • Report this Comment On June 27, 2008, at 12:29 PM, StrategyLeader wrote:

    Financial Analysts have discovered what has always existed!

    Open Season on GE!

    Since Jeff Immelt and his team were unable to meet the "very high expectations" that they promised in the first quarter, GE has been under a microscope and many of the surprised "analysts" are now running in the opposite direction.

    For instance: "C. Stephen Tusa Jr., who follows GE for JPMorgan Securities, cut his rating on

    the stock to "neutral" (i.e., "hold") from "overweight" ("buy"), saying the company faces too

    many near-term challenges -- including senior management's damaged credibility and the possibility that lower-level managers won't be willing to tell their hard-driving bosses the truth about things."

    The result is that it is open season on GE and the stock has declined by over 20% since Immelt's miss.

    But except for the Miss...nothing has changed!

    Obviously, missing expectations is a serious problem since it impacts credibility. However, the Immelt's GO BIG/ GO GLOBAL/ PORTFOLIO CHANGE strategy is the same as it was when he took over and his management team and philosophies have not changed.

    Immelt brags that he has sold over $50 billion in assets and acquired another $45 billion. He has moved business unit headquarters to Europe, aggressively targeted China, India, Middle East and has been even willing to invest in major research centers in "unsafe" areas like China and India. He has acquired financial service companies in Japan and Australia and then within four years put them on the block to be sold, while then making acquisitions in Poland.

    Confusion about what GE really is.

    Immelt has made GE into a giant global mutual/ hedge fund and made it clear that "no one and nothing is sacred." Of course this was the same philosophy of Jack Welch, but Immelt has made it even more complex since he had added systems, technological solutions oriented projects and businesses that were not part of the Welch game plan. The result is that GE is so complex that it appears that even the company leadership aren't sure what is going on.

    It is clear to me that the disciplines of sound strategic thinking and review, which stressed being realistic and avoiding surprising yourself and the other key stakeholders, have been replaced with "imagination and dreaming programs" that stress innovation and creativity over sound business assessments. Tusa puts it this way: "We also think the high bar for success in such a competitive environment could create a scenario in which bad news is not tolerated, making necessary communication with senior-level managers a challenge until it's too late to fix."

    Nothing really new... but concerns continue.

    Last year, I wrote an article in the June,2007 issue of Chief Executive Magazine entitled: Decision Time for Immelt and Buffet and made the following recommendations

    "Reduce Complexity

    Make It Simpler. Make the company less complex.

    Continue to Prune the Portfolio....I think that broadcasting and even additional parts of the traditional GE lines, like major appliances and lighting, could be divested. These moves would permit the company to focus on its major solutions, technology business, while maintaining its strong financial services operations. This portfolio approach may build more confidence among investors, since they recognize that the primary goal of the company is to continue to increase the bottom line.

    What if neither works? In this case, I think we need to adopt the new company motto “Imagination at Work” and look for a more creative approach that may initiate the next stage of the company.

    Let’s imagine that:

    · GE gives the investor an opportunity to invest in selective sectors of the company and not just in the total company portfolio. In this scenario, GE decides to offer stock in its key areas/sectors. For instance, it creates separate stock offerings in GE Healthcare, GE Infrastructure, GE Money, GE NBC/Universal, GE Commercial Financing and other key components of the company. These would replicate the current building blocks of the company. So investors could invest in either the total company or selective parts of the company. This is not unrealistic since many companies have done this and have been successful in doing so. Of course, this will require more evaluation.

    ·

    GE is major stockholder of new companies. The GE Corporation would continue. The company would only sell a part of the new companies and retain majority control over the businesses. I would recommend that GE retain 75 percent of the companies and sell the other 25 percent on the open market.

    ·

    GE would focus on maintaining GE traditional success factors. Under this new scenario, the GE corporate staff would be significantly reduced and focused on a few key areas. For instance, the company would continue to work on succession plans for the key management positions in the company and especially the next CEO. The corporate staff would monitor external changes and help the subsidiaries anticipate and respond to change, as well as change the portfolio as required. It would continue to have company wide training at all levels, take stands on political issues as needed and continue the strong financial, strategic and manpower networks that have contributed to its past success.

    The anticipated results could be very positive to all of the key stakeholders. The stock should rise overall, the investor will have more options and the company will continue to retain its AAA rating and have a strong and deep bench.

    In my latest book, The Secret to GE’s Success, I describe the company as remarkable, since it has had the ability to succeed and prosper for over 127 years. I use the word “Latin” to capture the five reasons for this success. These include leadership, adaptability, talent, influence and networks. Though all are important, I think one of the most important is the company’s ability to adapt and admit mistakes.

    Immelt and his team have adapted and created a solid, though complex, game plan. (The real question is whether it will work and whether the investment community will reward the company if it does.

    The verdict will be in within the next few years. I continue to believe GE is a remarkable company and hope that if and when the company must adapt, it will do so as effectively as it has in the past."

    The point is that GE has not changed, Immelt continues to pursue his same strategy, but he has lost credibility because he missed his numbers and has downgraded his optimism of the past. Now the vultures are circling to see what they can pick apart and all of the key GE stakeholders are suffering.

    I still assert that GE is TOO COMPLEX and that it must simplify the company and focus on not size and being global but having the best products and services in the segments it selects. It can't "be all things to all people", believe it can do anything because it is GE and continually act like a hedge and mutual fund, buying and selling assets and business. Further it can't have headquarters and R&D around the world since it is costly, inefficient, insecure and very costly.

    GE leadership and management must renew the attributes that made it successful for over 127 years and not just change for the sake of change. The key element is willingness to admit mistakes and adapt to reality... this was done in the past and is one of the major reasons the company has not only survived but has prospered... a rare exception to most major companies over the past 100 years.

    If you really want to understand GE issues and challenges, read my book and my many GEWatcher Blogs and then compare my insights and recommendations with the current situation. I still am a strong believer in GE but it must be able to admit mistakes and adapt and not just continue to purse "imagination dreams".

    Bill Rothschild, author of The Secret to GE's Success... in six languages and a "global best seller" and GEWatcher blogs.

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