Is the General Electric Turnaround Finally Here, After Immelt’s Long Slog?
It has taken a decade for investors to forgive Jeff Immelt for not being Jack Welch, but there’s a nascent bloom of absolution surrounding General Electric’s (GE) current CEO. While the market hasn’t exactly embraced his company – valuations on GE shares remain well below the heady days of Welch’s rein – the share price is up some 55% in the past year. Could it be that Immelt’s GE is finally, really, worthy of investors’ attention? Check out this stock chart.
GE’s forecasts lately are sounding a lot more optimistic than those of many mega corporations. In late September, just as weak worldwide economies caused a lot companies to report slowdowns, Immelt told analysts he expected GE’s underlying revenues to grow 10% this year. The analysts were impressed. They also liked his plans to make a lot of $1 billion to $3 billion acquisitions (as opposed to the $10 billion Welch variety), and his promises to spend more cash buying back shares and raising dividends. Most of them recommend buying GE shares.
Then again, most of them recommended these shares in early 2011, too, and those that did have little to show for it. Investors who followed those recommendations in 2007 surely wish they hadn’t. But for today’s investors to have any confidence in GE, they need to believe that Immelt has been doing the right things for the long term all along; that the timing for joining him is just better now.
Today’s GE is not the company Jack Welch built through many massive acquisitions; the one that gave investors near 700% total returns in the five years leading up to his departure in the days just before 9/11. The GE that Immelt crafted is the one that survived the immediate credit crunch, the financial sector meltdown, the ensuing worldwide economic slowdown, and the various crises that some of those acquisitions wrought. He sold off some of the most problematic properties and has been wary of the mega-takeover ever since. He’s opted for smaller acquisitions in higher-margin businesses like health care and oil and gas equipment, which don’t meet Welch’s preferences for big market leaders. In the company’s darkest days, Immelt had GE accept a $3 billion loan from Warren Buffett's Berkshire Hathaway (BRK.B).
Those measures helped keep the company profitable throughout the recession, but they came with gruesome costs to shareholders. At a time when GE shares were going for a small fraction of previous value, Immelt cut the dividend. The share price drifted.
The pervasiveness of GE’s low share prices post-financial-crisis has led to questions of whether investing in an old fashioned conglomerate makes sense anymore. Shares of GE’s more focused competitors, such as Emerson Electric (EMR) and Honeywell International (HON) about regained their pre-recession prices. Even conglomerate competitor United Technologies (UTX) has recovered. GE today is still a Dow component with a $241.39 billion market, but its shares still trade roughly 40% below 2007 levels; even further down from Welch-era prices.
But in the past year, the news from the company has grown steadily better. GE paid back Buffett in October, clearing the way for dividend hikes it says will be in-line with EPS growth. The dividend yield now is right at a respectable 3%. The company also plans to repurchase some $4 billion shares this year.
Its second quarter results surprised followers in June with a 2.5% rise in profits from continuing operations and forecasts of double-digit EPS growth in 2012. Immelt points to solid demand for GE products in the U.S. and in emerging markets as more than making up for European weakness, and he expects profit margins will improve.
Investors have taken notice, even though the hard evidence for say, a widening profit margin, isn’t really there yet. Valuations on the shares -- based on the PE ratio -- have jumped since a year ago.
So is this, at long last, the GE that will vindicate Immelt’s actions? GE is still a sprawling conglomerate, selling products as diverse as airplane engines, ultrasound machines, drilling platform equipment, light bulbs, and, most importantly, financial services. Whether it succeeds or fails with shareholders this time around will depend more on how well it’s running these businesses and less on how many of them it buys.