Why GE May Be Set to Buck the Bear


By Sam Jaffe When Wall Street heard the news that General Electric (GE) may be laying off as many as 75,000 employees by the time it completes its merger with Honeywell later this year, it responded with a resounding yawn. On Feb. 2, a day after BusinessWeek Online reported the possibility of widespread layoffs (see "At GE, Neutron Jack Is Back"), GE's stock budged up a mere 5 cents, or one-tenth of a percentage point, to $46.28.

Often, a company's announcement of massive dismissals results in a sharp uptick in its stock price. Why didn't that happen with GE? Because, say analysts who follow the stock, everyone already suspected as much. The only question mark involved the number. The prospect of layoffs "was already factored into the valuation quite some time ago," says John Inch, an analyst with Bear Stearns who rates GE as a buy.

LEGITIMATELY CHEAP. Nevertheless, the stock is only 15% above its 52-week low of $41 and is still nearly 30% off its high of $60 in September. Sense an opportunity? Many analysts think so. "This is the best time to buy GE that I've seen in a long time," says Prudential Securities analyst Nicholas Heymann, who rates the stock a buy. "There's a confluence of factors that make this the sweet spot." Unlike technology highfliers such as Cisco (CSCO) and Microsoft (MSFT), both of which also are heavily beaten down, GE is legitimately cheap on an earnings basis. Its price to 2001 earnings ratio is 36.

Heymann points to other factors as well. GE stock has been taking a beating along with everybody else in the market. Then there's the gag clause in the merger agreement with Honeywell, which will make it hard for the company to say anything until the merger is completed sometime before April. "They are in complete lockdown right now," Heymann says. "I think that they are not just going to meet estimates, but they'll exceed them, but because of the merger, they can't talk to anyone about it." Also, he points out, the company's ability to buy back shares in order to support the stock price is limited by the merger activity.

And while 75,000 jobs might sound like an enormous number, it still is only a fraction of the estimated 450,000-strong workforce of a combined GE/Honeywell. In addition, many job cuts have already been announced, such as the decision to let 28,000 workers go as part of the closure of Montgomery Ward stores.

BARE BONES. The bulk of the cuts will come as GE and Honeywell join together and create "irrelevancies" -- investment banker-speak for two people doing the same job. While GE has a reputation for being about as bare bones as an industrial conglomerate can be, Honeywell sure doesn't. If anything, Wall Street has considered it a consistently poor performer ever since CEO Lawrence Bossidy left in 1998. On a per-employee basis, Honeywell workers were producing less than half the revenue that GE employees made.

As many as 10,000 other cuts will come from GE's continuing "digitization" effort. That's the company's term for creating greater efficiency through the use of the Internet. Everything from applying for a mortgage from GE Financial to getting service for your GE microwave will eventually be moved to the Web, reducing costs and allowing the company to cut workers. "Digitization is real," Heymann says. "They are going to be able to cut 8% to 10% of their costs through digitization alone, and I would imagine that an equal number of job cuts could be made over the next two years."

The company itself still declines to confirm or deny the 75,000 figure mentioned by BusinessWeek. "GE has no layoff targets and no companywide numbers. We never announce overall layoffs because we don't plan for them across GE. We leave it up to individual businesses to decide what actions are necessary to meet their objectives," said company spokesman Gary Sheffer in a written statement.

"THE RIGHT BALLPARK." But other news organizations have confirmed the BusinessWeek report. "When you account for the merger, the digitization effort, and the closure of Montgomery Ward, it certainly is in the right ballpark," says Prudential's Heymann.

It's nothing new for GE to perform well during difficult economic times. The company is expected by analysts to earn $1.72 per share for 2002, compared to expectations of $1.48 in 2001. Pru's Heymann sees no reason to think it'll miss those expectations. "This is a company that performs spectacularly when times are hard," he says. "They're the only major firm that is raising estimates of growth rather than lowering them for the coming quarters." Layoffs or no layoffs, this blue chip is looking a little bluer than usual right now. Jaffe writes about the markets for BusinessWeek Online in our daily Street Wise column

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