Topic number one was GE's recent earnings miss for the first quarter.
It's not a surprise, really, that Welch and the CNBC on-air co-anchors carefully avoided the topic of yesterday's post, GE doing business in Iran. And that topic is still a popular one.
Yesterday, my blog registered 188 direct visitors, and 343 pages read, not counting those accessing it via Newstex distribution via Lexis/Nexis, et.al. That's more than twice the average of 70 visitors per day.
At 8:30 this morning, as I write this, 32 people have already visited, most for that post on Immelt, GE, Iran and Bill O'Reilly's segment Monday night on the topic, on which I appeared as a guest/commentator. There's a tremendous amount of interest in that subject.
But CNBC isn't about to lend credence or credibility to a Fox News investigation of its own corporate parent. Not even with its former CEO on the air this morning.
Instead, Welch chalked the entire drop in GE's stock price Friday, some 14%, to Immelt providing a bad earnings 'surprise.' That's it.
When asked about breaking up GE, for which I have argued for several years, on several bases, Welch sputtered that 'the model isn't broken.' He continues to insist that it's just one bad quarter, and Immelt is and will be paying for it. That Immelt has lost the trust of analysts and investors, but he'll 'get it back.'
I think Welch was a very capable and talented CEO for GE in his day. That day ended nearly seven years ago.
The nearby, Yahoo-sourced price chart for GE and the S&P500 Index from 1962 to the present clearly shows how GE has stalled in this decade.
In fact, the only time in the past 46 years that GE has really outperformed the index was under Welch. Taking the helm of GE from Reg Jones in 1981, a younger, energetic Welch transformed the sloppily-managed, sprawling, unfocused conglomerate into a much more responsive, better-managed, more tightly-focused company.
But as is evident from the chart, the index is where it was at the start of 2000, while GE is lower- much lower.
Welch kept, well, squawking this morning that the model has worked through the '80s and '90s. That's partly true.
Actually, he worked the model convincingly for twenty years. Somewhere around 1990, the model probably had ceased to work on its own. But by then, Welch's leadership of the last remaining diversified conglomerate was adding its own magical valuation effect to what otherwise would have been a lackluster stock.
In 1994, when I was at Accenture's predecessor, Andersen Consulting, my old boss from Chast Manhattan, the former senior strategy executive at GE, arranged a meeting for me with Welch. Back then, when my current work was in its infancy, information wasn't as easily and inexpensively available as it is today.
So, instead of comparing the total returns of GE and the S&P from Welch's start date as CEO to the date of the meeting, I used the price of GE stock vs. the Dow Jones.
That moment in the meeting is still fixed in my mind. The chart showed that nearly all of GE's performance advantage relative to the DJI occurred in just the first three years of Welch's tenure, when he aggressively shuffled his business portfolio, tightened performance criteria, and coped with management during inflationary times amidst inaccurate cost data.
Welch turned to me, scribbling madly on his copy of that page in my presentation, declaring,
"Nobody has ever shown me this. Nobody!"
With me at the meeting was my old Chase boss, Gerry Weiss, the GE veteran who knew Welch and had arranged the meeting. After we left the two-hour session, Gerry turned to me excitedly, saying,
"Did you see that? He wrote on that price chart of GE and the Dow. When they start writing on your charts, you know you 'have' them. You've shown them something new and interesting."
My point is that even as far back as 13 years ago, the exceptional period of GE's outperformance of the market had begun to ebb. The company rarely posted revenues growth in double digits for very long. Instead, Welch capably managed to boost productivity, in order to reliably deliver measured quarterly earnings growth.
Wall Street investors loved this, and the stock enjoyed a market multiple in excess of what it probably deserved just on revenue and earnings growth alone. It was Welch's reliability of delivering the steady performance increases that boosted the stock's value during his tenure.
Twenty-seven years later, capital markets are different. Private equity firms routinely buy troubled divisions of non-diversified conglomerates, or whole companies, fix them and spin them back out to the public. The diversified conglomerate model, as I have argued in prior posts related to GE, found by reading through the links on yesterday's (linked) post, is no longer necessary, nor viable. It simply isn't capable of delivering consistently superior total returns, relative to the S&P500, for more than a fortuitous year or two.
I respect Jack Welch for what he accomplished over a long and storied tenure as CEO of GE. It's understandable that he is loathe to declare the era of his old firm dead. And he's understandably reluctant to declare that he made the wrong choice of replacement for himself as CEO by tapping Jeff Immelt to succeed him at GE.
But that doesn't mean GE isn't an anachronism, or that Immelt is a capable CEO. I believe the opposite, on both counts. GE's ability to give investors a consistently better return than the S&P500 over any period beyond mere lucky timing is over. That being the case, Immelt is being paid far too much to underperform that index, as GE has since he took over as CEO.
Nothing can change those facts. Not even Jack Welch's hopeful declarations that the business world hasn't changed since he rose to lead GE 27 years ago.
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