This morning's CNBC Squawkbox program has featured three Nobel Economics laureates- Joseph Stiglitz (2001), Robert Engle (2003), Edmund Phelps (2006) and Robert Shiller, a Yale economics professor and author who has written about housing and financial markets.
I admit that it is interesting to see such an assemblage of economic talent in one place, and for that, I give CNBC credit. This part was sublime.
Of course, then they spoiled it by having their own resident senior economic idiot, Steve Liesman, share the air time with these other, professionally-trained economist PhDs.
Yes, that was the ridiculous part.
Generally speaking, Stiglitz, Engle and Phelps, along with Shiller, provided some simple, reasonable and insightful comments on various financial market topics.
For example, they noted that today's commodity price inflation is based upon real demand increases pitted against supply constraints, in the short run. Therefore, they cautioned against the folly of central bank rate increases to try to contain inflation. All agreed that this cure would simply kill the patient by throttling business growth.
Instead, they argued for allowing market signals to bring more supply onto the market, including the role of speculators. Rather than rail against those who, through derivatives, bet on commodity price increases, they note that these investors are taking risk with respect to a top in commodity prices, while providing added signaling power to suppliers of grains and energy commodities.
Their discussion of the housing market was rather more curious. To a person, especially including Shiller, they all argued for some form of Federal intervention, including Shiller's plea for some new governmental housing authority/lender of first resort.
Shiller contended that some nationalized mortgage bank needed to be created to lend and hold mortgages in a state of 'permanent workout,' was, I believe, the phrase he used, or something very near to that.
In effect, the Nobel economists, and Shiller, held that housing is so important to the US economy and its citizens that it is 'too important' to be left to markets. That private mortgage lenders engaged in overly-risky behaviors that have hurt us all.
Thus, in their considered opinion, we must now lodge all of this risk-assessment in a civil-service populated governmental entity.
Yeah. Right. And while we're at it, let's go find Russia's last seven year plan and try to emulate that, too.
But, to his credit, Stiglitz characterized the no-downpayment mortgages to poor people as essentially free options, because they were allowed to buy an asset with virtually no equity interest, betting on price appreciation. He noted that banks don't usually just give free equity options to financially shaky customers.
There aren't very many conservative economists, although some have won Nobel prizes. At least three of these economists- Stiglitz, Shiller and Engle- are pretty obviously liberals. Stiglitz served in Clinton's administration.
I think financial risk taking and mechanisms related to that is where economists part company with financial market theorists. For example, Steve Ross, currently at MIT, is both an economist and a finance professor. In an after-dinner speech at an MIT alumni function last year, he described the difference. There is one.
The assemblage of economic talent this morning on CNBC sort of self-organized into a stampede calling for more governmental oversight, regulation, pre-emptive action, etc., in the area of financial risk taking. I have to say, I think they all strayed on this topic pretty far from their actual area of expertises.
When viewer email questions were read aloud to be answered by the Nobel laureates, the first one involved who would be the best economic President among the current candidates.
On this point, you really saw politics and self-interest rear their ugly heads. Stiglitz and one of the other laureates quickly backed Obama. Arguments like his being 'new and open to new ideas,' and alleging that 'things are different now than in 1992, so Hillary won't be as appropriate' were the tone of their responses.
How disingenuous. Stiglitz worked for the Clintons, is a liberal Democrat, and probably sees the writing on the wall regarding Hillary's likely demise. If he's to snare another administration post, leading to more book sales down the road, what better way than to publicly provide Obama with his unsolicited endorsement on a nationally-watched, prominent business news program?
The most thought-provoking element of this morning's discussion amongst these economic literati, though, was the one about housing finance.
While I may disagree with Shiller's insistence on some ironclad uber-management of the function, in order to completely stamp out any sort of market 'failures' in the future, his arguments illustrate something important.
As my friend B has held for a decade, the eventual structure of the US financial services sector has seemed to be five or fewer gigantic utilities, along the lines of the current Citigroup, BofA, Chase and Wachovia. These firms, plus, perhaps, a few weaker investment banks added to them, have morphed into slowly growing, ponderous financial titans incapable of much growth.
B's idea was to eventually separate all of the truly core, insurable financial services activities, such as DDA accounts and transactions businesses- clearing, settlement, etc.- into government-insured, low-yielding utility-like entities.
Perhaps the ultimate solution for housing finance, along the lines of Shiller's suggestions, is to move residential home lending into a government-insured utility, too.
If housing is to be a major component of our economy, and we also wish to insulate borrowers against predation, interest-rate risk, and even asset value risk, perhaps we just need to remove the sector from the for-profit arena.
The last few decades saw significant private mortgage finance options grow to compete with Fannie and Freddie. Jumbo loans and low-doc, no-doc loans appeared, were offered and securitized. Now, it seems, the wisdom of that final step, and probably the earlier ones, was doubtful.
The effects of those mistakes, pulling housing prices down in the locales which also experienced such rampant appreciation, has soured many Americans on the idea of leaving this sector to private capital.
If, in their collective wisdom, citizens-cum-voters decide that they must punish private lenders, and themselves, indirectly, by prohibiting any more freewheeling privately-owned housing finance providers from behaving as they did in the prior housing cycle, so be it. In effect, Americans will have chosen to simply limit risk-taking in this sector, along with growth.
What the economists all failed to note, however, is the scream that would have arisen from liberals, had much of the private enterprise housing finance shut off credit to lower-income Americans. Charges of discrimination and redlining would have abounded.
Maybe, a la Shiller's solution, we'll just settle the argument once and for all by draining the profit-making incentive right out of housing finance, and returning it to its stodgier, less-risky roots in pre-1980s finance.
Friday, April 25, 2008
Some Recent Earnings Performances: Apple, Starbucks & Boeing Plus Microsoft On Yahoo Acquisition
Yesterday's Wall Street Journal contained articles on a host of interesting companies about which I have recently written. Nearby is a Yahoo-sourced two-year price chart of the various firms I'll mention in this post- Apple, Boeing, Starbucks and Microsoft- and the S&P500 Index.
For example, Apple, a company in which we currently hold long-dated call options, rose nicely following its earnings announcement.Despite the many protestations of pundits as notable as Herb Greenberg that Apple and Steve Jobs just could not continue to surprise, they did. Even when analysts factored in Apple's expectations management, the firm still outperformed them.
This is one reason that our equity selection process is so strong- it ignores those observers and analysts who fail to appreciate actual historical performance of individual companies, opting instead to predict to the mean of all companies' typical performances.
Then we have Starbucks, whose sales have been affected by related economic softness. By going downmarket in the past few years, as I've written in prior posts, the firm exposed itself to the more price-elastic buying behaviors of less-wealthy customers. We're now seeing the results of that strategy.
Whereas financial firms purchase excess growth through asset risk, consumer goods companies like Starbucks purchase it through penetration of non-traditional segments whose buying behaviors are different than those of its core customer group.
So far, Howard Schultz' return to the coffee giant isn't going so well.
Boeing reported earnings on Wednesday, too, also announcing earnings above expectations. Consequently, its stock rose on the news by some 4.5%.
Does this mean Jim McNerney has finally straightened out problems at the airplane maker? Not by a long shot. Boeing is still counting on reversing the Air Force's decision to use Airbus planes to replace its fuel tankers, and the Dreamliner may yet suffer another setback.
Whereas Apple has gone from strength to strength for several years, as evidenced by the price chart above, Boeing has been struggling. I'd have to see a much longer period of sustained revenue growth and total return superiority before I'd believe that Boeing has solved its problems.
Then we have Microsoft. For a change, the Journal's article about the tech giant's CEO, Steve Ballmer, actually reflected well on him. Having its Yahoo acquisition offer outstanding for nearly three months, the software vendor, as represented by Ballmer, is expressing confidence that they can, if necessary, skip the Yahoo deal.
That's actually heartening to me. Not that I'm a Microsoft shareholder. It hasn't been in my equity portfolio for nearly a decade.
But Ballmer made some sense in that he has acknowledged his own firm's risk in integrating Yahoo. Citing internal reasons for not increasing Microsoft's bid for Yahoo, the CEO gave shareholders some reason for sanity in the looming hostile phase of the firm's quest for the ailing internet portal player.
As miserably as Microsoft has performed for years, it will probably only do worse as it attempts to do several new things: integrate a large acquisition, deal with various staffing exits and other related issues, and then have to actually make good on the promise that the Yahoo acquisition will somehow solve all of the firm's ills.
So, on balance, it's been a promising week for some large US companies. Not necessarily sufficient for me to invest in those I don't already own, but at least some signs of better management and perspectives among CEOs of Boeing and Microsoft.
Thursday, April 24, 2008
Wachovia's & Citigroup's Annual Meetings
My longtime friend and sometimes partner, B, sent me a copy of the American Banker's article yesterday on the annual meetings of Citigroup and Wachovia.
The article noted,
"The chiefs of Citigroup Inc. and Wachovia Corp. faced angry shareholders Tuesday as both companies held their annual meetings.
Though disgruntled shareholders are not a new phenomenon at annual meetings, both Citi and Wachovia held their powwows this year on the heels of reporting substantial first-quarter losses tied to the persisting credit crisis.
In New York, several shareholders called on Citigroup's entire board to resign, but all the directors were reelected, Citi said, with at least two-thirds majorities. In Charlotte several investors demanded that G. Kennedy Thompson step down as chairman, president, and chief executive."
I couldn't agree more with the shareholders calling for Citi's entire board to resign. And, given Wachovia's troubles from its Golden West acquisition, Ken Thompson should be leaving, as well.
If you need to see why there's only one weapon for shareholders, selling the stock of a company with which they are disappointed, consider the article's portrayal of Thompson's disgusting behavior,
"Mr. Thompson heard the first salvo early on as a critic approached the microphone before he could begin his presentation. Manuel Lopez, identifying himself as a shareholder, was the first of several to call on Mr. Thompson to resign. He accused management of either withholding facts or being "completely unaware" of Wachovia's financial condition, drawing strong applause from many of the 400 audience members.
Mr. Thompson took the criticism quietly before offering a mea culpa in his prepared remarks. "I'm not here to sugarcoat things, make excuses, or say that we are a victim of circumstances." Wachovia's revenue stream is sufficient to carry it through the economic crisis, he said, and he forecast long-term success. "Nothing is more important to me than restoring credibility" lost in the October 2006 purchase of the big Oakland, Calif., thrift company Golden West Financial Corp., he concluded."
As the nearby Yahoo-sourced one-year price chart for Citigroup, Wachovia and the S&P500 Index indicates, both banks lost more than 50% of their stock's value in that time period, while the index was marginally negative.
With results like these, you'd think Thompson would at least offer to return a few years' worth of deferred compensation, to show his firm's shareholders that he really 'felt their pain.'
That isn't going to happen, is it?
No. And this is why reforming CEO compensation to consist largely of lagged equity awards subject to consistently beating the S&P500's total return. Otherwise, CEOs like Thompson win big in good years, and do just 'pretty well' when their prior decisions boomerang, as his did with the Golden West acquisition.
You know that if one of his subordinates had been so boneheaded as to have done something so foolish, Thompson would have fired him.
Pandit's a little different, in that he lucked into his job so late in 2007 that he can't really be held accountable for much of anything yet.
If only his board were to resign, the new one could learn a lesson from both banks' recent difficulties, and redesign Pandit's compensation to go light on cash payments, and heavy on lagged, S&P-performance-related awards of Citi equity.
Well, at least you can't say commercial banking is as boring as it used to be.
Wednesday, April 23, 2008
Ford's 18 Months Under Mulally: Is This a Turnaround?
I first wrote about Alan Mulally's involvement with Ford, the company of which he became CEO in September, 2006, in posts here and here, in December of 2006 and July of last year.
Now, this morning's Wall Street Journal heralds Ford as its "..Recovery Advances; Earnings Improve."
But, turnaround?
According to the nearby Yahoo-sourced two-year price chart of Ford and the S&P500 Index, they were at about the same place when Mulally took over, on a percentage basis, from May of 2006. Now, the index is positive, with maybe a +5% return, while Ford is still negative, with what looks to be a return between -5% and -10%.Granted, Ford has rebounded smartly from a -30% return only weeks ago, ending a precipitous slide begun last fall.
But, as I have asked in prior posts about 'turnarounds' at other firms, what will constitute a successful turnaround?
To me, net income performance, impressive as it has improved under Mulally, is not alone sufficient.
The pattern and magnitude of a firm's fundamental operating results create investor perceptions that underpin a firm's attainment of consistently superior returns for its shareholders.
Unless Ford is planning on really strong, consistent double-digit revenue growth in the years ahead, it's going to have to achieve any consistent total return performance mostly by productivity improvements.
It's clear that the Journal likes Mr. Mulally very much. All three articles about him provide unfailingly upbeat, flattering profiles. And my guess is they are not wrong.
Even this piece's details about Mulally's pushing to sell Jaguar and Land Rover, redesign the Ford Focus, and attack inventory problems all ring with the sense of a really good manager at work.
Still, call me sceptical. It's not just that Mulally must haul Ford back from the brink of bankruptcy or sale. He must, in my opinion, then lead the company to several years of unexpectedly good performance, either with new revenue and volume growth, or incredible productivity gains, in order to provide the basis for consistently superior total returns for shareholders.
Can Mulally accomplish this? Who knows? I'm a 'show me' kind of investor, and Ford has years to go before it can possibly, in my view, be accorded the title of a 'successful turnaround,' or 'recovery.'
Tuesday, April 22, 2008
United Technologies: A Different Type of Conglomerate Than GE
In last week's Wall Street Journal, the paper's minority owned breakingviews.com writers compared GE's recent and longer term earnings performances to those of United Technologies.
As it happens, Friday's Journal featured the UT earnings report, trumpeting the headline "United Tech's Profit Jumps 22%."
Of all the conglomerates which once dominated the US corporate scene up until the 1980s, only GE and UT remain. Names like Textron, LTV, Gulf & Western, Westinghouse, and Litton are history. ITT is no longer the sprawling giant of Harold Geneen's day, while the more recently-created Tyco has also scaled back after its architect, Dennis Kozlowski, went to jail.
Since GE is relatively better-known, and less-covered, let's take a moment to acquaint ourselves with the 'other' Connecticut-based conglomerate.
UT's website lists its current divisions: Carrier, Hamilton Sunstrand, Otis (Elevator), Pratt & Whitney, Sikorsky, Fire & Security, and Power.
The company largely serves two major markets: buildings and aircraft. The bulk of its divisions, products and services focus on the needs of customers with these fixed assets.
Originally created by its legendary first CEO, Harry J. Gray (1971-87), UT has only existed as a conglomerate since the early 1970s, as we will subsequently learn, below. After Gray, Robert Daniell (1987-1994) became CEO, ceding that position to longtime employee George David (1994-2008), who leaves the company this year.
This article describes the history of Gray and United Technologies. Specifically, note the following passages,
"Harry Gray had been appointed president of the United Aircraft Corporation in 1971. United Aircraft was at that time one of the largest companies in the country and had a long history of manufacturing airplanes and helicopters for the American military. Gray was determined to diversify United Aircraft in order to diminish the company's reliance on defense contracts. Flourishing Essex International became his first acquisition. Under United Aircraft, soon to be renamed United Technologies....
Through the 1970s, Gray continued his program of growing and diversifying United Technologies through acquisitions.
Although Harry Gray's aggressive policy of growth through acquisitions had built United Technologies into one of the 20 largest industrial corporations in the United States, in the mid-1980s a number of Gray's riskier ventures turned sour. Indeed, net income dropped by about $600 million between 1985 and 1986. After a great deal of internal turmoil amongst UTC management, Gray stepped down as CEO of the troubled firm in 1986. Robert Daniell was appointed in his place. Daniell immediately undertook a major restructuring of UTC, streamlining the unwieldy company by selling off divisions that did not fit into United Technologies' main product lines. In 1988, as part of this reorganization, the wire manufacturing operations of Essex were spun off as an independent company, although the new enterprise continued to produce the wire for the automotive wire assemblies and electronic devices manufactured by United Technologies Automotive. Daniell's reorganization of UTC also included the dissolution of The Industrial Products Division, thus making United Technologies Automotive an independent business unit within UTC.
By the late 1980s, with the major building blocks of the restructuring in place, UTC began to look once again towards strategic expansion, although this time only businesses that would mesh with their major product lines would be considered."
So we see that the modern UT is built upon a collection of businesses with explicitly related technologies, not just a scattershot of various unrelated businesses.
The nearby price chart for UT and the S&P500 Index, from UT's inception to the present, tells and interesting story.
A longterm 'buy and hold' investor would have done well to invest with Harry Gray back in 1971. But the same investor could have bought the index and jumped in later, around the time of Gray's exit, in 1987. Or, again, in 1994, when the current CEO, George David, took over leadership of the industrial conglomerate. In fact, all of UT's superior performance, relative to the index, can be accounted for by just David's years as CEO. Despite progress during both Gray's and Daniell's tenures, the relative gains for shareholders by UT, relative to the S&P, always evaporated. The company has had a relatively steady track record of total return performance, implied by the price chart, assuming a constant dividend. But, still, it couldn't consistently outpace the index.
It's clear that Gray's diversifications ultimately caused trouble for the company and its shareholders. For example, as Robert Daniell began to lead UT, this article appeared, describing his first two years as CEO,
"At the start of 1987, United Technologies took a charge of almost $600 million against earnings to reduce the work force and sell unwanted operations, reflecting a change from the earlier acquisition-minded growth days to a management stressing cost savings and profit margins.
Mr. Daniell sold off 25 businesses and focused on three major areas: aerospace, auto products and building products, including Otis elevators and Carrier air-conditioners.
The strategy has paid off, with United Technologies reporting 1988 earnings of $659.1 million on revenues of $18.5 billion, both record figures for the company."
So, as long as twenty years ago, UT began to pull back from the sprawl created by Harry Gray's reign. It now epitomizes the notion of a large, multi-business company focused on common customers and technologies throughout its units.
The company's name seems to now aptly describe it.
Contrast this with GE's more sprawling, less-related businesses: appliances, aviation, consumer electronics, electrical products, consumer & business finance, healthcare, lighting, media, oil & gas, rail, security, and water.
Originated from Thomas Edison's electrical-related ventures in the late 1880s, GE was itself originally a much more focused conglomerate.
As this GE webpage explains,
"1876 was also the year that Thomas Alva Edison opened a laboratory in Menlo Park, New Jersey, where he could explore the possibilities of the dynamo and other electrical devices that he had seen in the Exposition. Out of that laboratory was to come perhaps the greatest invention of the age - a successful incandescent electric lamp.
By 1890, Edison established the Edison General Electric Company by bringing his various businesses together.
Several of Edison's early business offerings are still part of GE today, including lighting, transportation, industrial products, power transmission, and medical equipment. The first GE Appliances electric fans were produced at the Ft. Wayne electric works as early as the 1890s, while a full line of heating and cooking devices were developed in 1907. GE Aircraft Engines, the division's name only since 1987, actually began its story in 1917 when the U.S. government began its search for a company to develop the first airplane engine "booster" for the fledgling U.S. aviation industry. Thomas Edison's experiments with plastic filaments for light bulbs in 1893 led to the first GE Plastics department, created in 1930."
Thus, we see that some of the current, or just-exited businesses, grew from events or technologies unrelated Edison's original electricity-oriented businesses.
When adding GE to the prior price chart, since 1971, for UT and the S&P500 Index, we see that UT has outperformed its more-diversified and famous fellow conglomerate. By a fairly wide margin, since the y-axis is logarithmic.
And, as I noted in this recent post, this chart again illustrates that GE's performance under Welch, from the early 1980s to 2001, were distinctly and uniquely superior, relative to the market. From Welch's retirement onward, GE has declined, then flattened, relative to both the index and David's later years with UT.
All conglomerates are not alike. The most diversified, financially-oriented US conglomerates of forty-plus years ago are long gone. Of the two remaining entities of this type, it's clear that the more focused, less-diversified one, UT, has handily and steadily outperformed its more famous counterpart, GE.
As it happens, Friday's Journal featured the UT earnings report, trumpeting the headline "United Tech's Profit Jumps 22%."
Of all the conglomerates which once dominated the US corporate scene up until the 1980s, only GE and UT remain. Names like Textron, LTV, Gulf & Western, Westinghouse, and Litton are history. ITT is no longer the sprawling giant of Harold Geneen's day, while the more recently-created Tyco has also scaled back after its architect, Dennis Kozlowski, went to jail.
Since GE is relatively better-known, and less-covered, let's take a moment to acquaint ourselves with the 'other' Connecticut-based conglomerate.
UT's website lists its current divisions: Carrier, Hamilton Sunstrand, Otis (Elevator), Pratt & Whitney, Sikorsky, Fire & Security, and Power.
The company largely serves two major markets: buildings and aircraft. The bulk of its divisions, products and services focus on the needs of customers with these fixed assets.
Originally created by its legendary first CEO, Harry J. Gray (1971-87), UT has only existed as a conglomerate since the early 1970s, as we will subsequently learn, below. After Gray, Robert Daniell (1987-1994) became CEO, ceding that position to longtime employee George David (1994-2008), who leaves the company this year.
This article describes the history of Gray and United Technologies. Specifically, note the following passages,
"Harry Gray had been appointed president of the United Aircraft Corporation in 1971. United Aircraft was at that time one of the largest companies in the country and had a long history of manufacturing airplanes and helicopters for the American military. Gray was determined to diversify United Aircraft in order to diminish the company's reliance on defense contracts. Flourishing Essex International became his first acquisition. Under United Aircraft, soon to be renamed United Technologies....
Through the 1970s, Gray continued his program of growing and diversifying United Technologies through acquisitions.
Although Harry Gray's aggressive policy of growth through acquisitions had built United Technologies into one of the 20 largest industrial corporations in the United States, in the mid-1980s a number of Gray's riskier ventures turned sour. Indeed, net income dropped by about $600 million between 1985 and 1986. After a great deal of internal turmoil amongst UTC management, Gray stepped down as CEO of the troubled firm in 1986. Robert Daniell was appointed in his place. Daniell immediately undertook a major restructuring of UTC, streamlining the unwieldy company by selling off divisions that did not fit into United Technologies' main product lines. In 1988, as part of this reorganization, the wire manufacturing operations of Essex were spun off as an independent company, although the new enterprise continued to produce the wire for the automotive wire assemblies and electronic devices manufactured by United Technologies Automotive. Daniell's reorganization of UTC also included the dissolution of The Industrial Products Division, thus making United Technologies Automotive an independent business unit within UTC.
By the late 1980s, with the major building blocks of the restructuring in place, UTC began to look once again towards strategic expansion, although this time only businesses that would mesh with their major product lines would be considered."
So we see that the modern UT is built upon a collection of businesses with explicitly related technologies, not just a scattershot of various unrelated businesses.The nearby price chart for UT and the S&P500 Index, from UT's inception to the present, tells and interesting story.
A longterm 'buy and hold' investor would have done well to invest with Harry Gray back in 1971. But the same investor could have bought the index and jumped in later, around the time of Gray's exit, in 1987. Or, again, in 1994, when the current CEO, George David, took over leadership of the industrial conglomerate. In fact, all of UT's superior performance, relative to the index, can be accounted for by just David's years as CEO. Despite progress during both Gray's and Daniell's tenures, the relative gains for shareholders by UT, relative to the S&P, always evaporated. The company has had a relatively steady track record of total return performance, implied by the price chart, assuming a constant dividend. But, still, it couldn't consistently outpace the index.
It's clear that Gray's diversifications ultimately caused trouble for the company and its shareholders. For example, as Robert Daniell began to lead UT, this article appeared, describing his first two years as CEO,
"At the start of 1987, United Technologies took a charge of almost $600 million against earnings to reduce the work force and sell unwanted operations, reflecting a change from the earlier acquisition-minded growth days to a management stressing cost savings and profit margins.
Mr. Daniell sold off 25 businesses and focused on three major areas: aerospace, auto products and building products, including Otis elevators and Carrier air-conditioners.
The strategy has paid off, with United Technologies reporting 1988 earnings of $659.1 million on revenues of $18.5 billion, both record figures for the company."
So, as long as twenty years ago, UT began to pull back from the sprawl created by Harry Gray's reign. It now epitomizes the notion of a large, multi-business company focused on common customers and technologies throughout its units.
The company's name seems to now aptly describe it.
Contrast this with GE's more sprawling, less-related businesses: appliances, aviation, consumer electronics, electrical products, consumer & business finance, healthcare, lighting, media, oil & gas, rail, security, and water.
Originated from Thomas Edison's electrical-related ventures in the late 1880s, GE was itself originally a much more focused conglomerate.
As this GE webpage explains,
"1876 was also the year that Thomas Alva Edison opened a laboratory in Menlo Park, New Jersey, where he could explore the possibilities of the dynamo and other electrical devices that he had seen in the Exposition. Out of that laboratory was to come perhaps the greatest invention of the age - a successful incandescent electric lamp.
By 1890, Edison established the Edison General Electric Company by bringing his various businesses together.
Several of Edison's early business offerings are still part of GE today, including lighting, transportation, industrial products, power transmission, and medical equipment. The first GE Appliances electric fans were produced at the Ft. Wayne electric works as early as the 1890s, while a full line of heating and cooking devices were developed in 1907. GE Aircraft Engines, the division's name only since 1987, actually began its story in 1917 when the U.S. government began its search for a company to develop the first airplane engine "booster" for the fledgling U.S. aviation industry. Thomas Edison's experiments with plastic filaments for light bulbs in 1893 led to the first GE Plastics department, created in 1930."
Thus, we see that some of the current, or just-exited businesses, grew from events or technologies unrelated Edison's original electricity-oriented businesses.
When adding GE to the prior price chart, since 1971, for UT and the S&P500 Index, we see that UT has outperformed its more-diversified and famous fellow conglomerate. By a fairly wide margin, since the y-axis is logarithmic.And, as I noted in this recent post, this chart again illustrates that GE's performance under Welch, from the early 1980s to 2001, were distinctly and uniquely superior, relative to the market. From Welch's retirement onward, GE has declined, then flattened, relative to both the index and David's later years with UT.
All conglomerates are not alike. The most diversified, financially-oriented US conglomerates of forty-plus years ago are long gone. Of the two remaining entities of this type, it's clear that the more focused, less-diversified one, UT, has handily and steadily outperformed its more famous counterpart, GE.
Monday, April 21, 2008
GM's Management Realignment
GM's brand management realignment was reported in an issue of last week's Wall Street Journal.
According to the article, the company has organized its eight brands into four groups, for purposes of coordinating sales, marketing and advertising.
Cadillac, Hummer and Saab have been grouped into a 'premium channel' of brands for GM, with former Nissan executive Mark McNabb appointed to manage the group in North America.
Buick, Pontiac and GMC form another brand group. Saturn evidently remains as its own brand. The article didn't detail which vehicles form the fourth brand group in this reshuffling.
Mark LeNeve, GM's North American marketing chief, was quoted as saying,
"Think about (the channels) like a business,"
with channel executives gaining control of and responsibility for marketing and sales resources formerly in the hands of now-eliminated regional sales executives. These channel managers will also have "a role in product development."
I guess anything GM can do to sensibly cut needless expenses is a good thing, relatively speaking. And perhaps doing that with similar-brand marketing and sales expenses is the next best thing to culling actual models and brands in the shrinking firm.
Still, one is left wondering,
"So what?"
Isn't the real Achilles Heel at GM product development and technological innovation?
Much of GM's marketing and sales strategies in recent years has involved zero percent loans and other pricing gimmicks to offload production.
True product differentiation based on features or customer-specific marketing and segmentation doesn't seem to have been the order of the day.
If it were, would sales have sagged so much? It's one thing to not have pricing power versus competitors, but at least match their sales penetration and market share.
In GM's case, it's been years since they have held share with premium gross margins.
Will this new marketing organization make this better? Well, technically, no, since the entire marketing and sales structure expenses fall under the SG&A line, which affects net profit, but not gross margin.
I continue to believe that for GM, cost-cutting is still a short-run solution to a long-run problem that involves creativity, design innovation and getting those functions back in touch with customer needs and preferences. In that sense, this reorganization only offers the hope that the single-line reference to the new brand group channel chiefs' input into product development might make some difference in the years ahead.
Based on prior results at GM, I wouldn't hold my breath waiting for this to work.
According to the article, the company has organized its eight brands into four groups, for purposes of coordinating sales, marketing and advertising.
Cadillac, Hummer and Saab have been grouped into a 'premium channel' of brands for GM, with former Nissan executive Mark McNabb appointed to manage the group in North America.
Buick, Pontiac and GMC form another brand group. Saturn evidently remains as its own brand. The article didn't detail which vehicles form the fourth brand group in this reshuffling.
Mark LeNeve, GM's North American marketing chief, was quoted as saying,
"Think about (the channels) like a business,"
with channel executives gaining control of and responsibility for marketing and sales resources formerly in the hands of now-eliminated regional sales executives. These channel managers will also have "a role in product development."
I guess anything GM can do to sensibly cut needless expenses is a good thing, relatively speaking. And perhaps doing that with similar-brand marketing and sales expenses is the next best thing to culling actual models and brands in the shrinking firm.
Still, one is left wondering,
"So what?"
Isn't the real Achilles Heel at GM product development and technological innovation?
Much of GM's marketing and sales strategies in recent years has involved zero percent loans and other pricing gimmicks to offload production.
True product differentiation based on features or customer-specific marketing and segmentation doesn't seem to have been the order of the day.
If it were, would sales have sagged so much? It's one thing to not have pricing power versus competitors, but at least match their sales penetration and market share.
In GM's case, it's been years since they have held share with premium gross margins.
Will this new marketing organization make this better? Well, technically, no, since the entire marketing and sales structure expenses fall under the SG&A line, which affects net profit, but not gross margin.
I continue to believe that for GM, cost-cutting is still a short-run solution to a long-run problem that involves creativity, design innovation and getting those functions back in touch with customer needs and preferences. In that sense, this reorganization only offers the hope that the single-line reference to the new brand group channel chiefs' input into product development might make some difference in the years ahead.
Based on prior results at GM, I wouldn't hold my breath waiting for this to work.
Sunday, April 20, 2008
YouTube Video Clip of My Appearance on The O'Reilly Factor RE: GE, Iran & Immelt
In this recent post, I referred to my appearance on last Monday's Fox News program, The O'Reilly Factor.
After a week, someone has finally put the video of the O'Reilly segment in which I appear on YouTube.
For those readers who did not see it, but wish to, here it is.
After a week, someone has finally put the video of the O'Reilly segment in which I appear on YouTube.
For those readers who did not see it, but wish to, here it is.
Friday, April 18, 2008
The Delta-Northwestern Airline Merger
Color me excited! I can write about a topic that doesn't mention Jeff Immelt, GE, Iran or even Jack Welch.
Earlier this week, Delta and Northwest Airlines agreed to merge their two companies. Needless to say, this attracted quite a bit of attention. Airline profitability, fuel costs, economies of scale, union power, and consumer service and satisfaction all received lots of ink as pundits and analysts opined on this event.
However, in my opinion, industrial economics pretty much guarantees that, even with this merger, airlines are still not fated to consistently outperform the market.
Why might this be true?
Because of these industry characteristics: easy entry, complicated exits, little control over most costs, high percentage of long-lived, expensive fixed assets on the balance sheets, and too much competition to reliably set prices which provide sufficient profitability.
I have written on this theme in prior posts here and here. The second linked post references an additional three prior airline-oriented posts. Of those three, this post, from nearly two years ago, frames this whole issue rather nicely. It even includes a very lucid reader comment noting that airlines are still pretty much required to function as a utility, flying to and from destinations which will never really pay their way, just to provide 'service.'
As I wrote, in some cases, several times in those prior posts, at some point, today's airlines have to admit to limits to growth, market saturation, and the probably reality that there is a 'right size' for most airlines, in terms of areas served, plane types flown, size of flight crews, and number of flights, before too much uncertainty of demand and costs make the model unsustainably profitable.
All of that said, the best solution is probably regional and buyer-segment-based competition/organization. Which is what I've argued in prior posts.
But as I wrote this post, it occurred to me that the reference to the year-ago post, and the reader's comment about the 'utility' aspect of airlines, begs another question.
Do not airlines resemble, to some extent, power-generation utilities? For example, in today's world, airlines, like energy utilities, are necessary. We couldn't really think of our modern world without them.
Yet who ever thinks of electrical/power utilities as growth equities? Nobody. Instead, they are viewed more like bonds.
Airlines are somewhat like that, insofar as major components of their cost structure are out of their control, yet pricing is not in their power. However, unlike utilities, which are granted monopolies, or quasi-monopolies, airlines are not.
So airline equities lack the upside of non-utility-like companies, but also the downside, reliable fixed-income-like behavior of utility equities.
They are in a really bad, gray in-between world. And with easy entry, difficult exit, and large shared-resource components, such as airports and the FAA ATC system, no airline ever controls all that much of its profitability dynamics.
In fact, historically, about the only thing an airline can grab and hold, uniquely and competitively, is the lowly physical gate. Owning gates can translate into a non-duplicatable advantage in a local market.
But that's about it.
With that in mind, the various articles this week in the Wall Street Journal about this merger begin to make more sense. Holman Jenkins' excellent editorial on Wednesday reminded us of the parallel of the airline industry to legal shipping industry 'conference' price and volume collusion. Only our own Senators and Representatives have forgotten this little detail.
On the same day, the Journal's Travel column wrote of this merger,
'Two drunks holding each other up is not a good idea, says an aviation consultant.'
The only positive spin on the merger came from- you guessed it- Delta and Northwest.
I find myself in the same position on airline equities that I have always held. Someone has to fly the airplanes and operate the airlines. Like someone has to generate America's power.
But I don't think you'll see my equity portfolio selection process choosing an airline anytime soon. Aside from some very occasional growth spurts for the likes of a younger Southwest Airlines, these companies simply have little to no prospects for consistently superior total return performance.
Their industry dynamics mitigate against that, and probably always will. Mergers or no.
Earlier this week, Delta and Northwest Airlines agreed to merge their two companies. Needless to say, this attracted quite a bit of attention. Airline profitability, fuel costs, economies of scale, union power, and consumer service and satisfaction all received lots of ink as pundits and analysts opined on this event.
However, in my opinion, industrial economics pretty much guarantees that, even with this merger, airlines are still not fated to consistently outperform the market.
Why might this be true?
Because of these industry characteristics: easy entry, complicated exits, little control over most costs, high percentage of long-lived, expensive fixed assets on the balance sheets, and too much competition to reliably set prices which provide sufficient profitability.
I have written on this theme in prior posts here and here. The second linked post references an additional three prior airline-oriented posts. Of those three, this post, from nearly two years ago, frames this whole issue rather nicely. It even includes a very lucid reader comment noting that airlines are still pretty much required to function as a utility, flying to and from destinations which will never really pay their way, just to provide 'service.'
As I wrote, in some cases, several times in those prior posts, at some point, today's airlines have to admit to limits to growth, market saturation, and the probably reality that there is a 'right size' for most airlines, in terms of areas served, plane types flown, size of flight crews, and number of flights, before too much uncertainty of demand and costs make the model unsustainably profitable.
All of that said, the best solution is probably regional and buyer-segment-based competition/organization. Which is what I've argued in prior posts.
But as I wrote this post, it occurred to me that the reference to the year-ago post, and the reader's comment about the 'utility' aspect of airlines, begs another question.
Do not airlines resemble, to some extent, power-generation utilities? For example, in today's world, airlines, like energy utilities, are necessary. We couldn't really think of our modern world without them.
Yet who ever thinks of electrical/power utilities as growth equities? Nobody. Instead, they are viewed more like bonds.
Airlines are somewhat like that, insofar as major components of their cost structure are out of their control, yet pricing is not in their power. However, unlike utilities, which are granted monopolies, or quasi-monopolies, airlines are not.
So airline equities lack the upside of non-utility-like companies, but also the downside, reliable fixed-income-like behavior of utility equities.
They are in a really bad, gray in-between world. And with easy entry, difficult exit, and large shared-resource components, such as airports and the FAA ATC system, no airline ever controls all that much of its profitability dynamics.
In fact, historically, about the only thing an airline can grab and hold, uniquely and competitively, is the lowly physical gate. Owning gates can translate into a non-duplicatable advantage in a local market.
But that's about it.
With that in mind, the various articles this week in the Wall Street Journal about this merger begin to make more sense. Holman Jenkins' excellent editorial on Wednesday reminded us of the parallel of the airline industry to legal shipping industry 'conference' price and volume collusion. Only our own Senators and Representatives have forgotten this little detail.
On the same day, the Journal's Travel column wrote of this merger,
'Two drunks holding each other up is not a good idea, says an aviation consultant.'
The only positive spin on the merger came from- you guessed it- Delta and Northwest.
I find myself in the same position on airline equities that I have always held. Someone has to fly the airplanes and operate the airlines. Like someone has to generate America's power.
But I don't think you'll see my equity portfolio selection process choosing an airline anytime soon. Aside from some very occasional growth spurts for the likes of a younger Southwest Airlines, these companies simply have little to no prospects for consistently superior total return performance.
Their industry dynamics mitigate against that, and probably always will. Mergers or no.
Thursday, April 17, 2008
Jack Welch On Immelt's GE- Redux: "Silly Talk?"
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?"
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?"
Wednesday, April 16, 2008
Jack Welch On Immelt's GE
This morning's CNBC Squawkbox program features two hours of retired GE Chairman and CEO Jack Welch as guest host.
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.
Tuesday, April 15, 2008
GE, Immelt, Iran, Bill O'Reilly's Fox News Story- and Me!
I had an interesting evening yesterday. Thanks to this blog, and my dozen or so posts on the mediocrity of GE's total return performance under its overcompensated CEO Jeff Immelt's 'leadership,' Fox News' program The O'Reilly Factor invited me to be a guest/analyst on this topic on last night's episode of the show.
O'Reilly led with allegations of GE's continuing fulfillment of contracts to do work with various entities in Iran, at a time when the US military has identified IEDs and other support for Iraqi terrorists who are causing US casualties as coming from Iran.
If this were all O'Reilly could say, it would be newsworthy, but perhaps not compelling on its own.
However, from reading my blog, one of the program's producers, and O'Reilly, further realized that Immelt has continued GE's involvement in Iranian projects while shareholders have lost money, due to GE's dismal total return performance. Meanwhile, as I noted in yesterday's post, and prior, linked posts, Immelt has been wildly overpaid for destroying so many hundreds of millions of dollars of GE shareholder value since he took over the CEO spot from Jack Welch in September, 2001.
O'Reilly ended his prepared comments on the 'Talking Points' segment about GE with rather strident language, saying,
"There are more than a few villain CEO's in this country, but Jeffrey Immelt could be the worst."
Given the available time and context of a news show like Bill O'Reilly's, one cannot always make all the points one would like to have expressed.
For example, in answer to O'Reilly's questions concerning why Immelt is able to remain as CEO of GE, despite poor total return performance and the alleged Iranian business dealings, I posited that it is, in part, due to GE's brand's homey, wholesome image for most American consumers, as well as the fear that many media and financial institutions have of GE's enormous spending power for corporate services such as: advertising, investment banking, stock trading, pension fund management, to name a few.
What I didn't have the time, or context, to add, were these points.
-GE, as a diversified conglomerate, is an anachronism. In today's equity markets, positions can be bought and sold for negligible transactions costs, making corporate diversification irrelevant and unnecessary. Gone are the days of LTV, Litton, Textron and Gulf & Western, whose diversification obviated retail investors to pay a 14% round trip brokerage commission to trade equities.
-It's very hard, in America, for companies to die or be killed off. CEO's don't typically fire themselves, and boards are reluctant to terminate the life of the company on the board of which they serve. There are millions of shareholders, but only a few board members, and one CEO, so there is little in the way of countervailing shareholder power to that wielded by the board and CEO of GE.
-GE, if split up, would no longer taint all of its business units with the performance and possible terrorists-related business practices of just a few of its units.
In any case, with a segment like last night's on The O'Reilly Factor, I was certain that someone from GE would begin to investigate who I am and what is on my blog.
I didn't have long to wait.
Thanks to my sitemeter javascript, this visit was logged at around 9:30AM this morning:
Domain Name (Unknown)
IP Address (omitted to protect privacy).# (GENERAL ELECTRIC COMPANY)
ISP AT&T WorldNet Services
Location Continent : North America
Country : United States (Facts)
State : Connecticut
City : Fairfield
Time of Visit Apr 15 2008 9:29:29 am
Last Page View Apr 15 2008 9:50:11 am
Visit Length 20 minutes 42 seconds
Page Views 8
Referring URL http://www.google.co...search associates%22
Search Engine google.com
Search Words "performance research associates"
Visit Entry Page http://pra-blog.blogspot.com/
Yes, someone from GE's corporate headquarters, located in Fairfield, Connecticut, spent about twenty minutes reading my blog. Probably beginning with yesterday's second post, and continuing back through several of my GE-related posts.
I know they were motivated by viewing the O'Reilly program, because the Google search term, 'performance research associates,' is the name of my LLC, as provided onscreen during my appearance on last night's Fox program.
What's next? I don't know. But I discussed with various friends and family members last night if, and how, GE might respond.
Since nothing presented on O'Reilly's program was false, there is no basis for defamation, slander or libel charges by GE or Immelt against anyone. The question becomes one of what, if anything, Immelt can reasonably do to respond to a set of highly embarrassing facts about him and the company he heads, GE, which aired on the most-viewed cable news show in America.
My business partner, one of whose other businesses involved distribution of information to media companies, marveled at how the conventional, old world of journalism has been turned upside down.
By writing frequently and factually about business topics on this blog, I was discovered by Fox News personnel and invited to provide analytic commentary about a major US corporation's faltering performance and overcompensated CEO. In today's online world, my blog, devoid of a dependency on advertising, owing no large company anything, is free to be objective and candid in my characterization of the performance of various corporations and CEOs.
No simple phone call to the head of Disney, CBS, or even Rupert Murdoch would affect this, or any other blog reporting on GE's dismal performance under Immelt.
But, back to the question, what will GE, and Jeff Immelt, do about last night's O'Reilly program?
Well, I doubt Immelt will resign or give back any of his past compensation. I don't think the board will announce that it is splitting up GE by week's end. And Immelt can't change history and make the total return for GE shareholders magically become better ex poste.
But what Immelt can do, and, I think, his predecessor, Jack Welch, would have done immediately upon being made aware of the Iranian contracts, is to summarily and instantly have all Iranian-related GE commerce halted. Period. Pay whatever contract penalties are required, and sustain whatever lawsuits may come, but shed the ongoing perception and liability of having to admit that GE is doing anything in Iran.
GE would still be left with its performance and structural mess, and Immelt's inept management thereof. But at least they'd be out of the crossfire over a sensitive issue like selling products to Iran in a Presidential election year during which American troops are deployed in Iraq and taking casualties from Iranian-supported efforts.
O'Reilly led with allegations of GE's continuing fulfillment of contracts to do work with various entities in Iran, at a time when the US military has identified IEDs and other support for Iraqi terrorists who are causing US casualties as coming from Iran.
If this were all O'Reilly could say, it would be newsworthy, but perhaps not compelling on its own.
However, from reading my blog, one of the program's producers, and O'Reilly, further realized that Immelt has continued GE's involvement in Iranian projects while shareholders have lost money, due to GE's dismal total return performance. Meanwhile, as I noted in yesterday's post, and prior, linked posts, Immelt has been wildly overpaid for destroying so many hundreds of millions of dollars of GE shareholder value since he took over the CEO spot from Jack Welch in September, 2001.
O'Reilly ended his prepared comments on the 'Talking Points' segment about GE with rather strident language, saying,
"There are more than a few villain CEO's in this country, but Jeffrey Immelt could be the worst."
Given the available time and context of a news show like Bill O'Reilly's, one cannot always make all the points one would like to have expressed.
For example, in answer to O'Reilly's questions concerning why Immelt is able to remain as CEO of GE, despite poor total return performance and the alleged Iranian business dealings, I posited that it is, in part, due to GE's brand's homey, wholesome image for most American consumers, as well as the fear that many media and financial institutions have of GE's enormous spending power for corporate services such as: advertising, investment banking, stock trading, pension fund management, to name a few.
What I didn't have the time, or context, to add, were these points.
-GE, as a diversified conglomerate, is an anachronism. In today's equity markets, positions can be bought and sold for negligible transactions costs, making corporate diversification irrelevant and unnecessary. Gone are the days of LTV, Litton, Textron and Gulf & Western, whose diversification obviated retail investors to pay a 14% round trip brokerage commission to trade equities.
-It's very hard, in America, for companies to die or be killed off. CEO's don't typically fire themselves, and boards are reluctant to terminate the life of the company on the board of which they serve. There are millions of shareholders, but only a few board members, and one CEO, so there is little in the way of countervailing shareholder power to that wielded by the board and CEO of GE.
-GE, if split up, would no longer taint all of its business units with the performance and possible terrorists-related business practices of just a few of its units.
In any case, with a segment like last night's on The O'Reilly Factor, I was certain that someone from GE would begin to investigate who I am and what is on my blog.
I didn't have long to wait.
Thanks to my sitemeter javascript, this visit was logged at around 9:30AM this morning:
Domain Name (Unknown)
IP Address (omitted to protect privacy).# (GENERAL ELECTRIC COMPANY)
ISP AT&T WorldNet Services
Location Continent : North America
Country : United States (Facts)
State : Connecticut
City : Fairfield
Time of Visit Apr 15 2008 9:29:29 am
Last Page View Apr 15 2008 9:50:11 am
Visit Length 20 minutes 42 seconds
Page Views 8
Referring URL http://www.google.co...search associates%22
Search Engine google.com
Search Words "performance research associates"
Visit Entry Page http://pra-blog.blogspot.com/
Yes, someone from GE's corporate headquarters, located in Fairfield, Connecticut, spent about twenty minutes reading my blog. Probably beginning with yesterday's second post, and continuing back through several of my GE-related posts.
I know they were motivated by viewing the O'Reilly program, because the Google search term, 'performance research associates,' is the name of my LLC, as provided onscreen during my appearance on last night's Fox program.
What's next? I don't know. But I discussed with various friends and family members last night if, and how, GE might respond.
Since nothing presented on O'Reilly's program was false, there is no basis for defamation, slander or libel charges by GE or Immelt against anyone. The question becomes one of what, if anything, Immelt can reasonably do to respond to a set of highly embarrassing facts about him and the company he heads, GE, which aired on the most-viewed cable news show in America.
My business partner, one of whose other businesses involved distribution of information to media companies, marveled at how the conventional, old world of journalism has been turned upside down.
By writing frequently and factually about business topics on this blog, I was discovered by Fox News personnel and invited to provide analytic commentary about a major US corporation's faltering performance and overcompensated CEO. In today's online world, my blog, devoid of a dependency on advertising, owing no large company anything, is free to be objective and candid in my characterization of the performance of various corporations and CEOs.
No simple phone call to the head of Disney, CBS, or even Rupert Murdoch would affect this, or any other blog reporting on GE's dismal performance under Immelt.
But, back to the question, what will GE, and Jeff Immelt, do about last night's O'Reilly program?
Well, I doubt Immelt will resign or give back any of his past compensation. I don't think the board will announce that it is splitting up GE by week's end. And Immelt can't change history and make the total return for GE shareholders magically become better ex poste.
But what Immelt can do, and, I think, his predecessor, Jack Welch, would have done immediately upon being made aware of the Iranian contracts, is to summarily and instantly have all Iranian-related GE commerce halted. Period. Pay whatever contract penalties are required, and sustain whatever lawsuits may come, but shed the ongoing perception and liability of having to admit that GE is doing anything in Iran.
GE would still be left with its performance and structural mess, and Immelt's inept management thereof. But at least they'd be out of the crossfire over a sensitive issue like selling products to Iran in a Presidential election year during which American troops are deployed in Iraq and taking casualties from Iranian-supported efforts.
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.
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.
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.
Bad Timing on GE In The Wall Street Journal
Sometimes you just have bad timing. Wall Street Journal writer Scott Patterson must be shaking his head after writing this piece in the Friday (morning) print edition of the paper,
"Investors Are Missing GE's Energy Gusher
General Electric's stock has languished for years, mostly due to concerns about the company's huge financial arm. Investors should start to focus on another side of GE: energy.
GE's first-quarter earnings report Friday should show how the company's energy exposure is helping it weather the U.S. slowdown. Analysts surveyed by Thomson Financial expect GE to post earnings of 51 cents a share, up 16% from a year ago.
The lion's share of GE's growth in recent years has come from its energy-centric infrastructure unit, which does most of its business outside the U.S. GE's revenue outside the U.S. gained 22% in 2007 from the previous year, according to Morningstar, driven by a 23% gain in its infrastructure segment. That compares with a 6% increase in the U.S.
Its energy revenue, including financial services and oil and gas, totaled $31 billion last year. Sales of steam and gas turbines, nuclear power equipment and alternative energy products have boomed as oil prices shot to record highs.
GE's stock hasn't seen nearly the same strength that other energy firms have seen. As energy stocks have soared, GE is down nearly 30% since 1999.
It has been trimming its financial assets, shedding several consumer-finances businesses. It also hasn't seen the subprime turmoil that has plagued Wall Street's large banks.
"I don't think GE is nearly as exposed to the general credit problems that we've been seeing in other financial stocks," says Richard Tortoriello, Standard & Poor's stock analyst.
Perhaps it's time for Wall Street to shift its focus."
Of course, we all now know that later that morning, before the market open, GE announced a very surprising first quarter earnings of $4.3B, which was less than its year-earlier $4.57B, and eight cents per share lower than the sell-side analysts who follow the company were expecting.
What's worse, for Patterson's accidental bad timing, GE had not just broad weakness in its operations for the quarter, but an unexpectedly bad performance at its financial unit. The very unit which an S&P analyst quoted in Patterson's piece thought would be less exposed to credit problems than other companies with financial service components.
It's really sort of funny, when you think about it. What were the chances that Patterson would recommend that investors consider buying GE because of its buried energy-related potential, only to see its financial services unit deliver a poor performance on that very day that ruined the diversified conglomerate's earnings?
Of course, as I've written in many prior posts, such as this one, in December of last year, such disappointments wouldn't occur if GE were split into its very separate pieces. The company plods along, lagging the S&P's return under CEO Immelt's reign, because it is a smoothed-over combination of very different businesses, some fast-growing, and some not.
As I wrote in that prior post, this passage beginning with a quote from a WSJ article,
""With half its revenue coming from abroad, many of GE's businesses, notably infrastructure, are still going full steam."
Doesn't this beg the obvious? If some GE units are 'going full steam,' maybe they should be spun off as a separate entity, in order to give shareholders something that can outperform the market while King Jeff I reigns supreme at the closed-end mutual fund cum diversified industrial conglomerate."
Perhaps a better conclusion for Patterson's Friday column would have been, rather than suggest investing in the current GE, to wait for its breakup, the better to benefit from owning its energy-related businesses as a pure-play equity all its own.
"Investors Are Missing GE's Energy Gusher
General Electric's stock has languished for years, mostly due to concerns about the company's huge financial arm. Investors should start to focus on another side of GE: energy.
GE's first-quarter earnings report Friday should show how the company's energy exposure is helping it weather the U.S. slowdown. Analysts surveyed by Thomson Financial expect GE to post earnings of 51 cents a share, up 16% from a year ago.
The lion's share of GE's growth in recent years has come from its energy-centric infrastructure unit, which does most of its business outside the U.S. GE's revenue outside the U.S. gained 22% in 2007 from the previous year, according to Morningstar, driven by a 23% gain in its infrastructure segment. That compares with a 6% increase in the U.S.
Its energy revenue, including financial services and oil and gas, totaled $31 billion last year. Sales of steam and gas turbines, nuclear power equipment and alternative energy products have boomed as oil prices shot to record highs.
GE's stock hasn't seen nearly the same strength that other energy firms have seen. As energy stocks have soared, GE is down nearly 30% since 1999.
It has been trimming its financial assets, shedding several consumer-finances businesses. It also hasn't seen the subprime turmoil that has plagued Wall Street's large banks.
"I don't think GE is nearly as exposed to the general credit problems that we've been seeing in other financial stocks," says Richard Tortoriello, Standard & Poor's stock analyst.
Perhaps it's time for Wall Street to shift its focus."
Of course, we all now know that later that morning, before the market open, GE announced a very surprising first quarter earnings of $4.3B, which was less than its year-earlier $4.57B, and eight cents per share lower than the sell-side analysts who follow the company were expecting.
What's worse, for Patterson's accidental bad timing, GE had not just broad weakness in its operations for the quarter, but an unexpectedly bad performance at its financial unit. The very unit which an S&P analyst quoted in Patterson's piece thought would be less exposed to credit problems than other companies with financial service components.
It's really sort of funny, when you think about it. What were the chances that Patterson would recommend that investors consider buying GE because of its buried energy-related potential, only to see its financial services unit deliver a poor performance on that very day that ruined the diversified conglomerate's earnings?
Of course, as I've written in many prior posts, such as this one, in December of last year, such disappointments wouldn't occur if GE were split into its very separate pieces. The company plods along, lagging the S&P's return under CEO Immelt's reign, because it is a smoothed-over combination of very different businesses, some fast-growing, and some not.
As I wrote in that prior post, this passage beginning with a quote from a WSJ article,
""With half its revenue coming from abroad, many of GE's businesses, notably infrastructure, are still going full steam."
Doesn't this beg the obvious? If some GE units are 'going full steam,' maybe they should be spun off as a separate entity, in order to give shareholders something that can outperform the market while King Jeff I reigns supreme at the closed-end mutual fund cum diversified industrial conglomerate."
Perhaps a better conclusion for Patterson's Friday column would have been, rather than suggest investing in the current GE, to wait for its breakup, the better to benefit from owning its energy-related businesses as a pure-play equity all its own.
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