Thursday, January 27, 2011

GE, Morgan Stanley & Sustainable Growth

Recent Wall Street Journal articles reported improved performances for GE and Morgan Stanley. On these bases, pundits are now sending the equities of the firms skyward, as seen in the nearby price chart for the two firms and the S&P500 Index.

GE's revenues for the quarter were up 51% from the year-earlier period. The Journal piece noted that the firm,

"posted its first revenue increase in more than two years and its highest level of new orders since 2007."

Morgan Stanley reported a 35% rise in profits versus the fourth quarter of 2009. However, one observer was quoted as saying,

"They need consistent revenue growth. That's where they've let investors down."

Ah, yes. Consistency.

Well, here's a look at the two firms' price charts, along with the S&P500, over the past five years.

Looks quite a bit different, doesn't it?

Over that period, the Index easily outperformed the two firms.

What do you suppose are the chances that both firms have suddenly changed the character of their enterprises? That they will continue to consistently report such revenue and income changes in the year ahead?

My guess is that the 51% GE sales growth is a one-time event. Morgan Stanley was lauded as having outperformed Goldman Sachs for the period, but one wonders how likely that will be in the next year.

Elsewhere, some pundits are calling for GE's Immelt to step down from his CEO job if he is to lead the government's new jobs creation initiative. They note that Immelt misled the firm to require a multi-billion dollar capital infusion from the federal government, suggesting he's not exactly a managerial icon.

A Wall Street Journal lead staff editorial on Wednesday charitably excused his mismanagement of the GE Capital unit for seven years, from 2001-08. The piece firmly placed the outsized reliance of the industrial conglomerate on outgoing CEO Jack Welch, but failed to properly hold Immelt accountable for continuing to rely on financial services revenues and incomes to prop up the troubled firm.

Consistency is a curious quality, because you can observe it over time. It isn't created instantaneously. Thus, recent performances notwithstanding, I doubt either Morgan Stanley or GE has suddenly changed its striped and become a new company in the past quarter, or even 12 months.

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