General Electric (NYSE: GE) is like that good baseball team that can not get over the hump. Pitching is good, but hitting is suspect. Or hitting is really good, but the defense is suspect. Somehow, the team plays well, but never quite gets over the hurdle to achieve greatness.
The same can be said about General Electric. As I stated this past weekend in breaking up is hard to do, GE has too many moving parts to "gel" perfectly. It is very tough for an analyst to do a credible job analyzing GE. The media component of GE requires an analyst with the skill set and training to properly publish on media. The GE Capital/Money division needs a financial services analyst to break down the complexities of the income statement. Bottom line: It's inefficient.
General Electric has a market capitalization of $383 billion as of this writing, making it second to only Exxon Mobile (NYSE: XOM) in size. Moving the needle just 10% is additional market capitalization of $38 billion - plus, or the equivalent of adding an eBay (NASDAQ: EBAY)!! GE has a current price to earnings multiple of 16 times, just about market average.
The stock and its PE will mirror the market average until GE can demonstrate a reason to investors to expand that multiple. So what happens if GE is broken up into several different operating, publicly-traded entities?
The first thing that happens is the enthusiasm of a fresh start. Different analysts look with fresh eyes at the specific units versus the whole. Different valuation parameters are placed on the parts versus the whole. NBC Universal may merit a PE multiple of 22-25 times: GE Capital / Money may merit a multiple of 15-18 times; GE Aerospace may merit a multiple of 18-20 times; GE Medical division may merit a multiple of 30 times, etc.
The second thing that happens is the goodwill premium sets into play. Carrying the customer base and name recognition as a "former GE division" could place anywhere from a 10-15% multiple premium on the newly created independent company. Investors love visibility and name recognition and a goodwill premium is allotted to those entities.
The third thing that happens is that each new publicly-traded company must put in place a new board of directors and fortify the senior management team. With this exercise comes new sets of ideas and creativity. The stodgy board of the current GE would go with one of the newly-formed companies. The rest get a new board. It's the same as moving a baseball game from the 9th inning back to the 3rd inning.
The fourth thing that could be exciting is the ability of a newly formed company to spread its wings and attract new capital and new investors.There is nothing more exciting than a clean slate as all past sins are forgiven. NBC Universal, as an example, would need to become aggressive in its television programming, its theme park competition with the Walt Disney Co. (NYSE: DIS), etc. No more hiding behind the massive corporate parent.
GE did 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 please visit the web site
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Reader Comments (Page 1 of 1)
4-30-2007 @ 4:07PM
gumbo said...
Lets split the unions first before you split GE. GE will be dragged by the union pension, benefits and freeloader expenses like GM is now. GE is a heavily unionized company. It is amazing that GE is still pullling in profits. Union will shorlty catch up with GE and drag it down. Maybe GE still has a younger workforce than GM, but not for long...The geezers are coming, the geezers are coming...
4-30-2007 @ 8:10PM
rmh47 said...
Don't know where you're getting your info, but it's about 40 years out of date. GE's workforce is well under 15% unionized. GE has aggressively fought with, worked with, and/or cajoled it's workforce, both union and non-union, on wages, benefits, and work rules to keep labor costs down. It also makes very liberal use of subsidiaries and (usually foreign) partners to manufacture those things which it still does make.
Most of GE's revenues and profits do not come from manufacturing anymore, and haven't for some time. In fact, much of it's sales and profits are generated overseas. GE is the number one or two player in almost every business that it is in. Many businesses, like jet engines have only one or two competitors (Pratt and Whitney, and Rolls-Royce in the cited instance), and those competitors have greater union obligations that GE.
It's pension fund is HUGELY overfunded, and the number of retirees drawing from it never changes much. They die off at about the same rate at which they are added.
A P/E mutiple of 16 is historically low for GE. It pays a decent dividend, and is diverse enough to almost be a mutual fund all by itself. If one of its businesses is down, another is up. This stock should be selling for about 40% more than it does. It' a bargain at what it sells for right now. BTW, GE thinks so, too. They bought back about 200 million of their own shares last year.
And yeah, I own it.(In the interest of full disclosure.)
4-30-2007 @ 8:32PM
Joseph Laukaitis said...
It is so easy to check the union information as applies to GE, its right there on the internet. Gumbo probably has an ax to grind or has been sadly misinformed. Misinformation is so prevalent today that everyone should be very careful about general statements. I hope Gumbo realizes how foolish he looks with his arguements.
5-01-2007 @ 11:11AM
Joe Carideo said...
i have said this time immemorial; ge is fine as it is. great businesses that lead their sectors; strong management with a culture of driving for success; very strong balance sheet. nbc is a problem but its a fashion problem ( one good season will turn the whole div. around). whats wrong with the stock price isnt what ge is doing....its what wall st is doing. the morons who work in trading, stock management, equity analysis, etc. have mentalities that cause them to root for silly cos. like coach leather, gen. motors(which is so bad its stock shouldnt be over $20),ralph lauren, abercrombie&fitch, etc. this is the randomness of wall st. most of these guys went to lousy colleges and probably live in nj. the very few with IQ's over 80 see the value of ge but they are too few in number.
5-02-2007 @ 2:45PM
Jordi said...
Generating enthusiasm in the market and ensuring better coverage from Wall Street's analysts sound like very poor reasons to split a company like GE. The rest are a bit better, but not much. I think you would have more credibility if you mentioned as well some disadvantages. You know... losing the value of the brand, the culture and business practices, reputation, synergies... things you don't build up in a couple of years.