General Electric Company (NYSE: GE) used to have a great advertising slogan: "GE: We Bring Good Things to Life." I don't know when GE dropped that slogan but since its stock has dropped 32% under its current CEO, I was wondering how it could bring new life to its stock.
When GE announced this morning that it would try to spin off its Industrial unit, I realized that GE would like to bring new life to its stock. And I was invited to GE's CNBC Power Lunch this afternoon to discuss this before my segment was canceled. If I had appeared, I would have discussed the benefits of focusing GE on businesses with high profit potential in which GE has a competitive advantage.
GE's best business in that regard is its booming Infrastructure Unit which had $58 billion in sales and $11 billion in profit -- up 23% and 22% respectively in 2007. Infrastructure sells power plants, aircraft engines, and locomotives to growing economies like the Middle East, China and India. Unfortunately, GE has many other business units which do not perform as well.
As it gets ready to report tomorrow morning -- analysts expect 53 cents a share -- I can't help but think how much faster GE could grow if instead of the 0% growth it is likely to post, GE shareholders could enjoy the 20+% growth of that Infrastructure business.
That Industrial unit is the dumping ground for many of GE's more lackluster businesses including appliances and lighting that are part of its heritage. Industrial generated $13 billion in sales and $1 billion in segment profit in the last year. In February I estimated it would fetch between $13 billion and $16 billion if GE sold it. That represents roughly 5% of GE's market capitalization --- not enough to make a big difference in the view of investors -- its stock is up 45 cents today.
GE is heading in the right direction with that divestiture plan. But unless it takes a harder look at each of its business units, shareholders will continue to suffer due to the earnings drag of all those under-performing units. If GE needs any help analyzing what to sell and what to keep, I would be happy to help.
In the meantime, I would have no problem backing up the truck with GE stock if I could depend on 22% earnings growth. If GE takes credible steps to achieve this goal, I think other investors would follow.
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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Reader Comments (Page 1 of 1)
7-10-2008 @ 4:44PM
william lindblad said...
CNBC read some of your blogs. Now you know why they cancelled.
GE is solid.
7-10-2008 @ 7:47PM
GINO said...
furthermore Immmet should have dumped the plastic operations years ago, now he wants to dispose of the appliance division right at the trough of applince competion-chinese at lower end an whirpool at the high end. Peacock TV operations have been last in ratings the last three years, and his supposed jewel medical diagnostics has shown no growth the last three quarters. Since VIVEVDI owns 20% of NBC Universal-either ViVENDI will put the stock to GE or may focrce a spinoff in November. His options are limited.
7-10-2008 @ 7:49PM
GINO said...
your total analysis is flawed- there is no way because of It's size 175 billion in revenues that this company could ever achieve 22% compounded growth rate through organic growth-remember Iam am saying organic Growth-not through acquisitions-Even 15% is a difficult to achieve.and financials still contribute approx 40% of revs and earnings.Try to wade through the opaque numbers in it"s financials. You need to be a forensic CPA.
7-10-2008 @ 9:37PM
Ron Lewis said...
It would be a mistake for GE to sell the appliance and lighting business. It may be under perfoming...but it's still netting the company 1 billion dollars a year.
7-11-2008 @ 12:46AM
Marshall said...
Whatever happens tomorrow, whatever the late in the game talk of spinoffs, even if they dump NBC after the Olympics, it all won't matter, as long as Immelt remains CEO-it's that simple! The record of these last 7 years, the perception of failure, the smell of incompetency will remain with him. He is an intelligent skillful man, but has the wrong personaltiy for our age, comes across muted and weak, and got caught up in the glory of keeping the great GE conglomerate he knew, instead of thinking outside the box.
Forget about last quarter, or this one-and the current economic situation-think of the 7 years of shameful performance of this stock (the S&P has been up 25% in the period this CEO has been in- GE is down 10%) -the absolute lack of regard for the average loyal shareholders.
The question I have, (please someone answer it)is why Immelt has never been challenged, by anyone, during all that time? The GE performance has been a joke-it has been the stock to avoid all those years, despite all it should have had going for it. Left and right CEOs have been pushed out for far less, and served much shorter periods. Perhaps the GE control of CNBC has been part of the answer(they are clearly terrified to say anything), but across t business jounalism he has been given an unbelievable free ride. Now, suddenly, after the last quarter everyone is waking up.
Yes, moves have to be made, the old model won't work-but the present CEO is DAMAGED GOODS, AND HE BRINGS THE COMPANY DOWN WITH HIM.