What Is General Electric? Part 1

By Reid Holloway  NOV 18, 2010 2:15 PM

Over the course of the company's history, it has gone from a titan to a mishmash of not-so-good ideas.

 


Editor's Note: This is Part 1 of a two-part series. Click here for Part 2.

Sometimes philosophies that seem perfectly agreeable on their own don’t seem so agreeable in the company of one another.

Consider, “I’m a devout worshiper at the Church of Whatever Works.” Sounds good. Why should you care whether the stock (or anything else) you own that doubles earns its dough selling coal, selling burgers, or selling smartphones -- it’s still a stock that doubles, and that’s the priority, right? Why shouldn’t that be a valid approach to everything?

Now consider, “You can’t know what you’re good for if you don’t know who you are.” Think of that philosophy as a modern-day knockoff of “To thine own self be true,” and it too seems like a pretty agreeable concept.

Yet when you put those two philosophies together, the pinball machine goes tilt. The second saw saws the first saw to pieces. Or, as my very practically minded cousin in Detroit has said, “It’s pretty amazing if you can graft a pig’s head onto a dog’s body,” appropriately respectful of the technological prowess that surely must imply. “On the other hand,” he notes, “what in the world do you do with such a creature?”{FLIKE}Such may be the case with General Electric (GE), perhaps the greatest story ever told in the history of American business.

There are two immediate priorities on GE’s strategic plate now. The first is continuing steps to shore up the company’s balance sheet, severely damaged by its costly forays in the insurance business, as well as by substantial hits sustained during the financial meltdown of 2007-2008. That process, already underway, has been seriously constrained by decidedly unexcited acquisition prospects GE might unload some major legacy assets upon. A second priority is completing the disposal of NBC Universal, expelling a majority stake in that giant entertainment mini-conglomerate component into the hands of cable empire Comcast (CMCSA) -- and a large part of GE’s motivation in consummating that divestiture is also balance-sheet related.

Tale of the Tape: From the Mighty to the Meek


If there’s only one thing even the most casual observer knows about GE, it’s what has happened to the company’s stock over the past several years. Until the carnage the market sustained leading up to the final weeks of the presidential campaign in which Barack Obama triumphed, GE maintained the distinction of being the sole remaining component of the 30 stocks making up the Dow Jones Industrial Average since its formation in the early 20th century (when it comprised just 16 stocks), and was also one of the most widely and heavily held issues of mutual funds, institutional investors, pension funds, and individuals’ retirement nest eggs. Thus the effect of what you see in the following devastated holders of equity shares large and small across the board.



Here’s a company that for the better part of four decades -- from the early 1960s to the dot-com crash breaking the dawn of the new millennium -- marched relentlessly upward, even outperforming Apple (AAPL) shares for most of that latter company’s publicly traded history until about five years ago. You can also see that it handily outperformed the S&P 500 consistently throughout the nearly half-century depicted above. Having achieved those feats, however, the stock by its March 2009 nadir erased more than 80% of its value relative to its pre-dot-com crash peak of roughly $60 split adjusted. It’s now trading in the $16 vicinity, representing a market cap around $175 billion. By comparison, Apple’s market capitalization now hovers around $300 billion, while ExxonMobil (XOM) stands at about $360 billion.

I’m not aware if anyone has come up with a number of retired Americans who were dealt financial body blows as holders of both GE and GM securities over the past decade, but I’m pretty sure it’s not a small number. I do know, however, that that population segment was never offered a bailout for their woes, and I also suspect that the overwhelming majority of those people also own their own homes and have gotten kicked in the teeth on that score as well.

It’s been a tough decade for seasoned citizens -- for all of us -- but the impact on that particular demographic, stockholders whose loyalty to GE and General Motors (GM) was once the financial equivalent of American patriotism, is an undertold story, to say the least.

“A Bank in Drag”

Visit GE’s website, and it won’t take you long to discover that one of the world’s largest public-relations apparatuses has created a dialect all its own reminiscent of Tuscany to inform readers that GE is in the “imagination” business, whatever that may mean.

I would personally “imagine” this is the result of throngs of wordsmiths banging their collective head up against brick only to find that GE’s voluminous business lines are practically impossible to describe coherently in plain English.

Indeed, they offer a creditable stab at that too, with the following:
 
Our Company

GE is a global infrastructure, finance, and media company taking on the world’s toughest challenges. From everyday light bulbs to fuel cell technology, to cleaner, more efficient jet engines, GE has continually shaped our world with groundbreaking innovations for over 130 years.


Having read and laboriously pondered that spiel, it’s no wonder GE retreats to a universe of make-believe words including “Healthymagination” and “Ecomagination,” the former a reference to an equally not-so-elucidating phrase, “sustainable health”; the latter, the company states, reflects “GE's belief that financial and environmental performance can work together to drive company growth while taking on some of the world's toughest challenges.” Say what?

Belief or no belief, “growth” in recent years at GE has been, to put it kindly, formidable. The top line for 2008 was $183 billion. That number declined during 2009 to $157 billion. The average Wall Street estimate for 2010 is about $150 billion. The balance sheet reveals corresponding decay too. For the past three reported years (2007-2009), total assets, total liabilities, retained earnings, and total stockholder equity have flatlined. Net tangible assets have fluctuated between $8 billion and $40 billion. Net income for the same period has plummeted by more than half. According to analyst expectations, GE may actually show a double-digit increase in per-share results for 2011 if 2010’s results come in on track, but that would be coming off a now-decimated base.

Who -- or what -- is GE? For all the light bulbs, solar power projects, health-care systems technologies, locomotive and jet engines, dehumidifiers, dishwashers, microwave ovens, refrigerators, washers and dryers, commercial engines, GE Honda Aero Engines, marine engines, military engines, Walter Engines, consumer electronics, computer accessories, digital cameras, home electric products, SmartHome Products, telephones, digital energy products and services, centrifugal pumps, gas turbines, gasification, hydropower and water control products, nuclear energy facilities, steam turbines and wind turbines, half the company’s revenue is derived from financial services, a dicey business these days, and not just at GE.

Click here for Part 2.




No positions in stocks mentioned.

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