Monday, April 14, 2008

Immelt's GE's Bad Earnings "Surprise"

Friday's GE earnings announcement before the equity market's opening bell is, by now, old news.

Perhaps the signature reaction to this dismal news by GE was Mike Holland's on CNBC Friday morning. Holland promptly cited Immelt's recent personal $4MM investment in the company, forgave Immelt as obviously not having known this was coming, and suggesting that this makes GE a much more attractive buy.

It reminds me of a saying introduced to me years ago by a Lehman broker whom I briefly dated. She recited the patter for a falling stock,

'If you liked it at $30, you'll love it at $25, and you'll marry it at $20!'

Pretty funny stuff, until you reflect on the analytical model it implies. Basically, it touts a stock and suggests that the market is wrong, so just keep on loading up as it falls. Dollar-average it, baby!

Unfortunately for its shareholders, I think GE is not going to change all that much, and will continue to disappoint investors. The nearby, Yahoo sourced price chart for GE and the S&P500 Index for the past five years indicates as much, and over a considerable time period. In other, prior posts, I've noted that GE has underperformed for all of Immelt's CEO tenure.

Consider the following factors specific to GE's recent and continuing mediocre performances.

Immelt was 'surprised' by the earnings slip. It sent the S&P500 down just over 2% on Friday, while the company's shares fell nearly 13%. As a management issue, you have to ask why Immelt and his corporate staff were so misinformed only a few weeks ago, when they confirmed their prior guidance for GE's first quarter performance.

Back in the 1980s, Sam Armacost, erstwhile CEO of Bank of America, lost his job largely due to an incredibly large, unexpected loan loss charge-off that he and his staff failed to identify more than a month prior to an earnings announcement.

This sort of 'surprise' doesn't speak well for a company's overhead-consuming corporate staff, does it?

For GE, it's especially galling, I would think, because it is a diversified conglomerate. The last of its type, really. The sort of corporation at which the corporate staff doesn't really manage any businesses, but functions more in a coordination and information management capacity. Immelt and his staff can't reasonably allege to have much effect on the performance of GE's mammoth-sized units. If they do, then something's seriously wrong. If they don't, why the need for the expensive, added layer of oversight, when shareholders could hold equities in each of its 4-6 major operating units as independent entities.

Then there is the issue, on which I touched in this post earlier today, concerning GE's diversified structure obscuring better-performing, faster-growing businesses by lumping their results in with much slower-growing, sometimes ailing units, like, currently, financial services.

As I noted in this post, back in August, 2006, and this one, in May of last year, there is no longer even a theoretical basis for a diversified conglomerate like GE to exist in today's capital markets.

Despite Immelt's recent public rejection of the notion that he should spin off NBC/Universal, Friday's earnings 'surprise' provides another reason why the entire company should be dismantled. If shareholders had the opportunity to own GE's entertainment unit separately, then this recent financial services unit debacle wouldn't have effected the former's performance.

A reader named Svaha left this comment on my recent post about Immelt's purchase of $4MM of GE stock,

"Well, smart-alec, looks like Jeff lost some money on his purchase of GE shares."

True enough, Jeff lost something in the range of $600-700K on Friday just on his recent market purchases of GE equity, as he disclosed in the company's annual report. But if you read the entire post, you'll see that I'm focused on the longer term, not just one day's losses, Mr. Svaha.

Jeff Immelt is crazy- like a fox. Losing a few hundred thousand in one day, much of which will likely be recouped in the months ahead, is a small price to pay for retaining his position earning tens of millions of dollars per year at GE.

Immelt's compensation means he's already won that game, as I noted way back in this March, 2006 post, as well as this more recent one. Now, I think he's just playing to stay in his job a few years longer.
It would be easy to call for Immelt's resignation, as might be implied by his words about taking 'accountability' for the earnings shortfall Friday. Typical CEO-speak calculated to make him look chastened, humbled and sorry. But still CEO.
However, the real culprit in this continuing saga of corporate mediocrity and excessive CEO compensation is the GE board. Rather than list all of the board members, I've linked GE's webpage listing them all here.
It's frankly unrealistic to expect Immelt to fire himself, give up his lush cash and deferred compensation packages, and the power and perks of being GE's CEO.
But is it asking too much for the board members, who putatively serve the shareholders' interests, to retain one or two outside consultants for the purpose of valuing the company's holdings as long term, independently-operating businesses? And, if this looks like a better value for shareholders, instruct Immelt to dismantle GE, with incentives for doing so in a manner that most richly benefits current shareholders?
I don't think so. It's their fiduciary duty. Sure, Immelt has been, and is being compensated far too richly for underperforming a simple, inexpensively-purchased S&P500 Index fund. But equally to blame is his board, for allowing him to do.
Looks to me like there is plenty of blame to go around to Immelt and his board for the continuing mess at GE.

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