General Electric Company (NYSE: GE) is scheduled to report second quarter earnings this Friday. Ten analysts that Zacks surveys expect GE to make 53 cents a share, the same as it did in 2007. Given that 0% growth rate, GE's forward Price/Earnings ratio of 12.1 seems a bit on the high side.
But after the spanking that CEO Jeff Immelt took after missing in the first quarter by 13.7%, he could be guiding analysts lower only to surprise them on the upside. This makes me wonder whether analysts have a higher, whisper number in mind. GE stock is down 32% since Immelt took over on September 7, 2001, but with the exception of the first quarter, over the last five years GE has increased earnings at an 8.1% annual rate.
If it got back on that track in the second quarter, then investors would expect GE to earn 57 cents a share, instead of the official 53 cents. In that case, GE stock would fall unless it exceeded 57 cents a share. I have not been able to determine whether there is such a whisper number floating around Wall Street, but there's no question in my mind that Immelt cannot afford to report a number less than 53 cents a share if he wants to keep his job.
And if he wants to remove speculation about his future, GE needs to report far more than 53 cents. If Wall Street has no whisper number, then 57 cents could boost GE stock -- particularly if Immelt raises earnings guidance on Friday. If Wall Street has a whisper number and it's 57 cents, then Immelt will need to beat that higher figure to get investors enthused.
I think that his big problem is that unlike his predecessors, Jack Welch and Reg Jones, Immelt has not made a discernible mark on GE. While Welch is famous for the way he boosted earnings at double digit rates and drove up GE's stock price, his boss, Reg Jones, was widely respected for his contributions to strategic planning. But Immelt is struggling to find a way to outdo these legendary GE leaders.
I don't know enough about GE to offer any useful suggestions, but I would get rid of all the GE businesses with weak profit potential and poor competitive position. Applying this strategic planning mindset would leave GE with its Infrastructure unit, which is booming thanks to the growing demand for its products in the Middle East, China and India.
This is a risky bet-the-company strategy as it leaves GE vulnerable if these now-growing economies collapse. But based on his track record, Immelt's incrementalism could be riskier still.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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