After my meeting with General Electric Co. (NYSE: GE) CFO Keith Sherin last week, I tried to figure out how much GE's NBC Universal might be worth in the open market. Such analysis is relevant now for two reasons:

• GE's stock price has fallen 2% under its current CEO. When Jeff Immelt took over as CEO on September 7, 2001, GE was trading, 2%, or 87 cents, above today's $38.79. During that same period, the S&P 500 rose 40%. In predecessor Jack Welch's first 5.9 years as CEO, GE's stock rose 221% from a split-adjusted $1.40 in April 1981 to $4.50 in March 1987.
• A respected analyst recently advocated a breakup to get GE stock moving. The New York Times [registration required] recently reported that Citigroup Inc.'s (NYSE: C) John Sprague issued a report titled "Partial Break-Up Could Break Deadlock on the Stock."

Is GE worth more broken up in pieces and sold or kept intact? To answer this, let me explain how a conglomerate like GE can raise its stock price. My theory is that GE management has two levers: the P/Es of the industries in which GE competes and the earnings growth rates of its businesses in those industries. To increase GE's market value, its management should prune GE's portfolio of businesses with the lowest P/Es and slow earnings growth -- replacing them with high P/E, fast earnings growth businesses which it can run successfully (if that can be done without overpaying). Nevertheless, as noted here, I am not sure whether a conglomerate is a good corporate strategy for GE because it may be leading the stock market to discount its earnings by 4%.

I address whether breaking up GE will increase its stock price in Breaking Down GE, a seven-post series.

Continue reading Why breaking up GE isn't worth the bother: A BloggingStocks seven-part series

Why breaking up GE isn't worth the bother: A BloggingStocks seven-part series originally appeared on BloggingStocks on Mon, 30 Jul 2007 09:45:00 EST. Please see our terms for use of feeds.

Yesterday I was one of six or seven writers who had a lunch with General Electric Co. (NYSE: GE)'s CFO Keith Sherin. I was asking myself: What is GE and why would an investor want to own its stock?"

What jumped out at me is that GE's greatest business opportunity is in building the infrastructure of emerging countries such as Saudi Arabia, China, and India. As reported in this morning's Wall Street Journal [registration required] GE expects to get about 60% of its growth in the next decade from emerging markets, including the Middle East, China, India and Brazil. By 2010, its sales are likely to reach $50 billion in those markets, up from $30 billion in 2006. GE's power, health-care equipment, aircraft engine, and commercial finance units are the likely beneficiaries.

Moreover, today GE announced $1.8 billion in energy orders from the Mideast -- consistent with that trend. But I see this opportunity as buried somewhat within a portfolio of businesses that could be a distraction from pursuing this emerging markets infrastructure opportunity. This leads me to the questions that I would like answered as a GE investor:

Continue reading Is GE an investment play on emerging markets infrastructure buildout?

Is GE an investment play on emerging markets infrastructure buildout? originally appeared on BloggingStocks on Wed, 25 Jul 2007 14:53:00 EST. Please see our terms for use of feeds.

In yesterday's lunch with General Electric Co. (NYSE: GE) CFO Keith Sherin, the discussion addressed a wide variety of issues regarding the way GE thinks about managing its portfolio of businesses. My overall conclusion is that GE has a rigorous process for deciding what to keep and what to sell but as an investor I wish it was more transparent about how it makes those decisions.

Here are some of the nuggets of insight about GE which I found particularly interesting:

• At the beginning of current CEO Jeff Immelt's reign, GE was trading at a Price/Earnings ratio of 40 -- it now trades at roughly half that level
• GE goes through an annual process of evaluating each of its businesses to assess whether to keep or sell them. In so doing, GE analyzes the profit potential of the industry, GE's competitive position, whether GE is "the best steward" to run the business in a "shareholder-friendly" way, whether the business can achieve its goals, and whether there are opportunities to invest capital at high rates of return.
• GE expects its businesses to earn returns on average total capital (ROTC) exceeding 20%

Continue reading Analyzing GE's business portfolio

Analyzing GE's business portfolio originally appeared on BloggingStocks on Wed, 25 Jul 2007 11:12:00 EST. Please see our terms for use of feeds.

Next Tuesday I am scheduled to meet with General Electric Co. (NYSE: GE) Chief Financial Officer Keith Sherin to discuss GE's performance and prospects. This meeting came at the company's initiation.

As a GE shareholder I have not been thrilled with the performance of the stock. Since September 7, 2001 when current CEO Jeff Immelt took over, the stock has risen 3% from $39.60, compared to a 40% increase in the S&P 500. Moreover, on the basis of its Price/Earnings to Growth (PEG) ratio of 1.5 -- based on a P/E of 19.5 and earnings forecast to grow 13% to $2.50 in 2008 -- GE looks somewhat overvalued to me.

So here are some questions I plan to ask:

• Since the current GE CEO took over, GE stock is up 3%, compared to a 40% increase in the S&P 500. Why has GE stock underperformed this average?
• GE stock has risen 23% in the last year, however, it trades at a PEG of 1.5 which makes it a bit expensive. Why should investors buy GE stock now?
• Since the Healthcare, Industrial and NBC Universal segments all saw revenues fall in the first half with relatively weak profit performance, why doesn't GE sell these businesses and invest the proceeds to increase its market share in the more financially successful Infrastructure and Commercial Finance units?
• If GE chooses to stay in Healthcare how will it offset the negative impact of the federal government's decision to cut reimbursements to nonhospital imaging centers?
• Under Jack Welch, GE's philosophy was to only be in businesses in which it could be #1 or #2. Recently NBC was ranked the 4th most watched network. Will GE sell NBC? If not, why is GE keeping NBC? How does NBC's coordination with other GE divisions increase GE's overall revenues or lower its costs?
• How vulnerable is the GE Money unit to an increase in consumer loan defaults? Is GE Money likely to experience accelerated revenue and profit growth in 2008 or slower growth? Why?
• What impact would a 10% decline in the dollar have on GE's Earnings Per Share (EPS)?
• What other external factors -- such as an increase in interest rates or a rise in energy prices -- represent the biggest risks to GE's EPS? How do you quantify those risks?

Please let me know which ones you'd like to add to the list.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He owns General Electric stock.

What questions should I ask GE's CFO? originally appeared on BloggingStocks on Fri, 20 Jul 2007 11:00:00 EST. Please see our terms for use of feeds.

General Electric Co. (NYSE:GE) is about to begin working the Wall Street crowd. The message: we have quality earnings. Don't worry, no hidden earnings or balance sheet problems here. "Jeff and I can do a better job of explaining our performance quarter by quarter," Keith Sherin, chief financial officer told the Financial Times, speaking of himself and GE's CEO.

GE still may be looking past the writing on the wall. Investors are not worried about the quality of GE's earnings. They are worried about the lack of earnings progress at some of GE's operating units. Revenue at the company's industrial unit fell 5% to $8.04 billion in the fourth quarter of 2006. Segment profit at the unit fell 12% during the period.

GE's NBC Universal unit has still not shown that it can deliver anything beyond mediocre results. In the fourth quarter of last year, NBC Universal revenue rose 1%.

GE's management has it all wrong. No one wants to hear about "quality of earnings". Being in businesses that are growing is much more important.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Also check out some other earnings reports that we're following, and let us know what you're expecting.

GE wants Wall Street to believe it's worthy originally appeared on BloggingStocks on Mon, 26 Feb 2007 09:21:00 EST. Please see our terms for use of feeds.