General Electric and Its Army Robert Brokamp (TMF Bro) (TMF Bro)
January 20, 2000
Can a company that develops CAT scan technology, runs the Penske truck leasing operation, and underwrites Internet start-ups be focused enough to succeed? Witness General Electric (NYSE: GE), which reported another quarter of record earnings and revenues this morning.
GE's sprawling reach is worthy of discussion, but -- as David Brancaccio says on the GE-sponsored radio program Marketplace -- "first, let's do the numbers." Fourth-quarter earnings came in at $3.09 billion, or $0.93 per share, up 16% from the year-ago period and a penny ahead of the consensus estimate reported by First Call. Revenues for the fourth quarter came in at $32.86 billion, a 15% increase from Q4 '98's $28.64 billion.
Preliminary 1999 results show similar growth levels for the year. Earnings increased 15% to a record $10.7 billion; EPS also grew 15%, to $3.22 from $2.80. Overall revenues were $112 billion, up 11% from 1998. Operating margin (excluding charges) was a record 17.8%, up from last year's 16.7%.
The world's second-largest company, as measured by market cap, shrunk a bit today in what has become a regular practice: GE stock runs up before an earnings announcement and drops a bit afterwards. The stock was down over 4% by lunchtime.
But there's no reason for shareholders to weep, given the stock's performance over the last five years: GE stock has risen more than six-fold, compared to the S&P 500's tripling.
There is no question that GE is an excellent company. The real question, as far as Fools are concerned, is can anyone understand it as an investment? How can the average investor truly follow a company that, according to The Wall Street Journal, made approximately 150 acquisitions in 1999 and is expected to make another 200 in 2000?
To start, one could look at the list of GE's businesses. The most profitable is GE Capital Services, which is the largest non-bank financial company in the world. Its insurance, financing, and consumer services (such as mortgages, car loans, and annuities) account for almost half of GE's revenues. The least profitable -- though the most well known -- division is GE Appliances, but it's trying to turn things around with strategic Internet alliances with Home Depot (NYSE: HD) and Microsoft (Nasdaq: MSFT). (As explained in this article, GE and Microsoft are teaming up to create "smart" appliances; imagine getting to work and finding out, through the Web-enabled link to your house, that you left the stove on -- and you can turn it off from the office.)
Sandwiched between those two divisions are nine others, including GE Aircraft Engines (which produces a large share of the aircraft engines in the world), the lucrative GE Medical Services (maker of Ultrasound, MRI, and X-ray equipment), and the NBC network (which includes MSNBC, NBCi (Nasdaq: NBCI), and CNBC, which surpassed CNN in daytime viewership during November and December).
GE is an emblem of American business. Thomas Edison is among its founders. It is the only company still on the Dow that was part of the original 1896 index. It invented Silly Putty. But do its hundreds of thousands of shareholders really know what's going on with the company?
Because of its diversification, GE has often been referred to as a mutual fund. Perhaps that's how many view the investment, as a more interesting -- and generally more profitable -- alternative to funds. After all, among all the indexers out there, how many understand even one-tenth of the businesses in the S&P 500? (I, for one, don't.)
By the way, if you do index through the S&P 500, you are already reaping the benefits of GE ownership. General Electric alone was responsible for 8% of the S&P 500's return in 1999, according to Barron's, which placed GE behind only Microsoft (12%) and Cisco (9%).
So, if it's difficult to understand how GE operates its sundry businesses in over 100 countries, an investor must put a good deal of faith in management. Indications are that this is not such a bad idea. Even though Chairman and CEO Jack Welch Jr. plans to retire next year, it seems that his two-decade reign has established the company as a lean, mean EVERYTHING machine. The Six Sigma quality improvement program Welch instituted in the early-'90s has reaped big rewards; it saved the company $1.2 billion in 1998 and has helped operating margins, net margins, return on equity, and return on average invested capital increase steadily over that past several years.
It has also helped that GE is taking so much of its services online, resulting in lower costs and improved efficiency. Also, GE has placed greater emphasis on garnering service contracts for the products it manufactures, which has provided a steadier revenue stream.
Finally, the company last month announced an expanded share buyback program, a 3-for-1 split, and its 24th consecutive year of raised dividends.
Jack Welch's strategy is to be number one or number two in an industry, or don't be in it at all. If the company continues to follow through, expect GE to keep chugging right along -- which is what you'd expect from the world's largest manufacturer of locomotives.
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