GE's conglomerate discount

Posted Aug 16th 2006 8:47AM by Peter Cohan
Filed under: Management, Competitive Strategy, General Electric (GE)

Either General Electric Co. (NYSE: GE) needs to do a better job of explaining its business to investors or it needs to change its corporate strategy. As reported in today's New York Times [subscription required], despite its efforts to explain the value of its processes, GE's stock remains 43% below its August 2000 peak of $58.69.

To be fair, GE did well in 2003 and 2004, beating the market while posting 30.7% and 20.7% returns respectively. However, in 2005, the stock fell 1.4% and it is down 3.9% so far this year.

GE, which under Jack Welch and previous leaders, has been perceived to be a global leader in management techniques, is now trying to sell itself to investors based on four "processes":

Innovation/Cross-Selling. GE notes that its research department has developed new products and services which it uses in its different divisions. For example, it developed sensors used in medical devices and security systems. And it cross-sells financing and fleet management;
Lean Six Sigma. GE has been using this technique for streamlining business processes and cutting costs for years. Under current CEO Jeff Immelt, GE has added Lean to the Six Sigma mix;
Net Promoter Score. GE scores its customers on whether they would recommend GE; it labels each as a detractor, neutral, or a promoter; and it calculates the score by substracting the detractors from the promoters; and
Deep Bench. GE has been allowing its operating managers to present at analyst meetings rather than requiring Immelt do all the presenting. This is intended to let investors know that GE has many talented managers.

None of these management techniques is really impressing investors. As I've posted in the past, we live in an era of "beat and raise." Under Jack Welch, GE stock rose because GE always seemed to beat earnings estimates by a penny. However, under Immelt GE is not beating and raising so its stock is not moving.

If it wants to impress investors, GE must show them how much additional profit growth they can expect as a result of these processes. Otherwise, investors may view GE as a conglomerate whose growth is limited to that of the US economy, which the Fed and many economists expect to slow down in the near term.

GE must convince investors that its growth can accelerate (its earnings grew at an annual average of 4.4% over the last five years and are expected to increase at a 10% annual average over the next five years). Since it trades at an expensive Price/Earnings to Growth (PEG) ratio of 1.66 (below 1.0 would be attractive), investors are not likely to get excited about its stock.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, and a Professor of Management at Babson College. He owns GE shares.

Tags: GE, Immelt, management, Six Sigma, SixSigma, stock

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Reader Comments (Page 1 of 1)

8-16-2006 @ 4:09PM

J L Phipps said...

Cohan's reasoning reflexs a person who doesn't understand a good investment when he sees one. Thank God there are people like Cohan. The market is a land of opportunity because of his intellect. GE is the best diversified company in the World. It sells at a mere 16.5 times earnings. It pays a 3% dividend. In addition to this, GE expects the next 5 or so years to be outstanding years in terms of earnings increases and that should result in dividend increases. For someone who wants a good investment with limited risk, it appears to me that you couldn't do better than GE. Also, in this time of alternative energy coming into its own, GE will most likely be a big player in this trillion dollar market. Tell Cohan to sell his shares and move on --I am staying with GE.

8-16-2006 @ 4:35PM

sheldon said...

JL, I think Peter understands your points very well. Very practical observations Peter. That said, I do agree with JL so let me add a few points that investors might not be considering. GE is a leader in power generation, water filtration, magnetic imaging,finance, aviation and a few other things that require vast resources. All of these businesses are essential in developing countries and are valued at a premium going forward. Their competitors are also huge. Their enterprise focus is not one that allows for competition without tremendous access to capital, stong management and long range planning, all of which they have in abundance. While GE is not the first company I would seek to put my money in, it would be high on the list. I think in the next few years it will reward patient investors nicely. Peace to all.

8-16-2006 @ 5:08PM

sheldon said...

One more thing...
Timing is everything! It would be a shame if investors who bought into GE early and have been going nowhere for six years, now sold, just when things might pick up. It is very common for the average investor to jump in when things are exciting and bail out after disappointment only to find they were early to buy and early to sell moving in the opposite direction of the growth curve. GE is not a stock for traders.