Friday was a fascinating day for General Electric Co. (NYSE: GE); the shares were actually up $1 and trading volume was at 91 million shares, nearly triple the usual amount. The hoopla started when Citigroup research mentioned that GE should be broken up and spun off into separate companies. It's about time.
I have been writing about the possibility of GE splitting up for the past year for members of my website. It only makes sense. The problem with General Electric is that it has too many moving parts to properly predict consistent growth. GE is expected to generate revenues of $176 billion this year, with earnings per share of $2.22. For 2008, early consensus is for revenues of $196 billion and earnings per share of $2.48, barely a 10% increase over 2007.
Revenues are growing at slightly less than 10%. The 10% number is a magical number for Wall Street. If a company falls under that benchmark, serious questions about strategy and direction need to be asked -- and answered. Jeff Immelt, CEO, has been under the gun recently as the shares of GE have plodded along for the past six years in a narrow trading range. The bottom line is that there has been minimal growth for shareholders, but a decent dividend -- currently at $1.12, for a 3.1% yield.
GE has a market capitalization of $378 billion and is one of the most successful companies in the world. No question, investors who have owned the shares these past 20 years have been superbly and amply rewarded. The Jack Welch era saw skyrocketing growth of revenues and earnings, not to mention many new management principles crystallized in his books.
That was then -- this is now.
The stock market rewards one thing and one thing only: earnings growth. If GE's moving parts are having a tough time synchronizing growth, the company and the shareholders -- the ultimate bosses -- are better off breaking up this company. A few more reasons are worth exploring. The market does not reward "conglomerates" with a high price-to-earnings multiple. The reason is the abundance of many moving parts; one or two divisions grow better than three or four other ones, and the market has to digest the entire entity versus the parts. Also, there are very few "conglomerate" research analysts out there. Several firms follow GE, but the quality of the research is mediocre at best. If GE Capital were its own company, a financial services analyst would follow it; if NBC Universal were its own company, a media analyst would follow it. You get the idea.
General Electric must perform this year and next or the pressure and the demand to split up will be enormous -- and justified. I know many investment bankers are salivating at the thought of splitting up GE. Each of the 11 divisions is being broken down by marketshare, market size, growth rates, and competitor valuations. If the break-up value of GE is worth a total of $500 billion in immediate market capitalization, versus the $378 billion of the current entity, the decision will be a lot easier -- and quicker. The current P/E multiple on GE is 16 times 2007 earnings. If the individual divisions can capture a 20 P/E multiple because of the individual sector dynamics, that also makes the decision easier and profitable. For the moment, General Electric is under the microscope.
GE does bring good things to life -- now it's the shareholders' turn.
Georges Yared is the CIO of Yared Investment Research. For more growth stock ideas visit the website.
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Reader Comments (Page 1 of 1)
4-29-2007 @ 7:27PM
A. Kosmetatos said...
Thank you Mr. Yared for telling it like it is, Something needs to happen or Mr. Imelt needs to be replaced.
A. Kosmetatos
4-29-2007 @ 11:58PM
Michael J Dunn said...
It seems to me an analyst makes a statement about selling parts of GE and the stock shoots up A dollar and Jeff Immelt is only frustrated. Citi group agrees only because they want the money operations and the real estate also now whos kidding who? I wonder who bought a good chunk of those shares on friday?
MIke Dunn
Schenectady