I didn't intend to continue writing about GE this week. But as long as Jack Welch keeps making dubious statements about the performance of his former company and the CEO he chose to replace him, I'll keep posting about it.
As I wrote in this post, yesterday, Welch guest-hosted for two hours on CNBC, and spoke about Immelt's big earnings miss with GE's first quarter results last Friday.
In that post, I discussed the difference between the 'Welch effect' on GE's stock early on in his tenure as CEO of the firm. And the way in which he ratcheted down GE's revenue growth, while putting a premium on reliable, steady, if modest, quarterly earnings growth. Thus, Welch kept GE moving in concert with the major averages- S&P500, Dow- over the latter years of his time at GE.
As a result of yesterday's comments, Welch sparked articles today in both the Wall Street Journal and the New York Times.
From the Journal article, we read,
"Five days after General Electric Co. disappointed investors with a surprise first-quarter earnings slump, Chief Executive Jeffrey R. Immelt defended his strategy and dismissed cries to split up and remake the conglomerate.
But even as he moves to address rising investor pressure, he came under criticism Wednesday from another important constituent: GE's high-profile former CEO, Jack Welch.
Mr. Immelt has a "credibility problem," Mr. Welch said on CNBC, a cable network owned by GE. Citing GE's missed earnings forecast, he said: "Here's the screw-up: You made a promise that you'd deliver this, and you missed three weeks later."
Mr. Welch defended his former protégé and GE's sprawling portfolio of businesses in a subsequent interview. "I truly believe this nonsense about breaking up GE and Immelt's in trouble is crazy," Mr. Welch said.
On his CNBC appearance, Mr. Welch said, "I'd be shocked beyond belief and I'd get a gun out and shoot him if he doesn't make what he promised now." But in an interview afterward, Mr. Welch defended the man he chose over two other candidates to replace him 6½ years ago. "He got his a- kicked because he said one thing and did another. That's the first time. This guy has a hell of a track record," he said.
"Jeff is moving in all the right directions to create growth for the future in what is a very difficult time and therefore will take time," said Warren Bennis, a business professor at the University of Southern California who has written about GE."
To be honest, I don't think Welch's comments begin to appropriately deal with the length and depth of Immelt's consistent underperformance for nearly 7 years as GE's CEO. And for Welch to ignore this, and claim that 'This guy has a hell of a track record' only marks Welch as now lacking in any realistic judgment of what constitutes superior corporate performance.
You have only to peruse my prior posts on GE, found under that label on this blog, to see factual evidence of Immelt's consistent inability to even match the S&P500 Index during his reign as CEO at the only major remaining American diversified industrial conglomerate.
Today, Welch appeared on CNBC from a remote location to try to 'clarify' his remarks about GE and Immelt. This time, he claimed to be fully supportive of Immelt, GE and the company's diversified model. The co-anchors on the program, Becky Quick, Joe Kernen and Carlos whathisname, discussed how Welch had indeed defended Immelt yesterday, but was simply quoted by soundbite and, thus, out of context.
Well, let me say that if what they said is true, it's a sad day for Welch and CNBC. As I have written numerous times about Immelt and, now, more recently about Welch, how can this dismal performance be excused?
It was Bill O'Reilly's first, and salient question to me during my Monday night appearance on his Fox News program, the O'Reilly Factor, about which I wrote here.
Jack Welch's final dismissal of the correct call to dismantle GE was to refer to it as "silly talk" in his interview on CNBC this morning.
What don't Jeff Immelt, Jack Welch and Warren Bennis get about GE's lack of performance? And, while I'm on this topic, Warren, if you ever read this post, please call me. I would love to be your investment manager. If you think GE is a good equity to own, and are willing to give people like Immelt 'time' to perform, boy, do I want to charge you 2/20 for managing your assets!
Well, as one friend from my fitness club, a longtime, retired Merrill technical analyst, Larry, put it,
'Here is what Immelt needs to say- I've increased earnings and revenues at GE during my tenure as CEO. It's not my fault if the market can't see the value I have added!'
Nice try, but not good enough. Why not? Simple. As I responded to Larry,
'For $20MM in compensation a year, on average, $5MM of it in cash, Immelt had damned well do better than just increasing earnings. You can't spend GE's earnings. All you get is the total return, and that has been less than the return of the S&P for the period of Immelt's tenure as CEO. For $20MM/year, a CEO had better simply know how to get his company's total return up above the S&P's!'
If a CEO wants to be excused for his company's fundamental, income-statement performance not generating consistently superior (to the S&P's) total returns, then I suggest he return all of the compensation he's been paid, over about $350,000/year. Anything over that is theft from the shareholders if he doesn't understand what performance patterns and levels, over time, will lead to a consistently superior total return for his shareholders.
Or, he could call me. Because I have proprietary research results on large-cap firms that explains what patterns and levels of fundamental performance do lead, with higher than average probabilities, to consistently superior total returns.
I use a more rigorous version of my performance research (thus, the name of my LLC- Performance Research Associates-) to select companies for inclusion in equity and/or options portfolios. Portfolios that, on average, have outperformed the S&P significantly over many years.
This week, the WSJ-minority-owned unit, breakingviews.com, published a piece about GE, wherein they noted,
"But this just underscores the problem with GE's model. Yes, the stellar results at one division help offset crummier ones elsewhere. So GE may, overall, be a strong concern worthy of its triple-A credit rating. But as a consequence, it isn't a growth company. As first-quarter results make plain, its returns are middle-of-the-pack at best. They also show that GE's predictability -- another of its model's supposed benefits -- is questionable.
Of course, it might not be GE's model so much as its execution. Rival Connecticut conglomerate United Technologies has chalked up share-price performance seven times better than GE's over the past five years.
Since Mr. Immelt took over from Jack Welch in 2001, many shareholders have urged GE to significantly cut exposure to volatile financial services and real estate. Mr. Immelt and the board resisted those calls, preferring to whittle around the edges while times were good. The demands for change won't diminish now that times are bad. But GE's ability to fend them off will."
So I'm not the only one calling for GE's breakup. It is so stunningly simple. Here, in the clearest manner in which I can articulate the argument, is the logic:
1. Anyone can buy the S&P500 Index performance by owning a cheap, passive S&P500 Index fund from a vendor such as Vanguard, Schwab, or T Rowe Price. For something like .2 cents on the dollar, you can earn an average of 11% per year, the S&P long term historical average return.
2. Since taking the helm at GE, Immelt has presided over an average total return of something close to -2.3% per year.
3. Over the same timeframe, the S&P rose roughly 9.5% per year.
4. Owning a given amount of GE stock exposes the investor to substantial risks, due to concentration of assets in one equity, which are mitigated by owning 'the market,' when one puts the same amount of assets into an S&P500 fund. It will also be more expensive to buy GE, or own it through an actively-managed mutual fund.
I don't think I can make it any simpler. Nobody is well-served owning GE when they can realize a higher total return in a cheaper, better-performing S&P500 Index fund from any reputable fund complex.
Until GE is broken up into its constituent, unrelated business units, it is highly likely to continue to cost its shareholders significant performance penalties, relative to their ability to simply buy and hold an S&P index fund.
"Silly talk," Jack?
How about, "A sensible solution to GE's performance problems that has been a long time in coming?"
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