GE Investors Start Saying "Jack Who?"


By Amey Stone

Jeffrey Immelt is no Jack Welch. And in a way, investors in General Electric (GE ) and analysts who follow the stock increasingly seem to like that, a year and a half after Immelt succeeded the legendary Welch as chairman and CEO of the venerated industrial giant.

In stark contrast to Welch's decades-long string of double-digit earnings growth, GE under Immelt has suffered declining earnings and revenues. Many of its cyclical businesses slumped, along with GE's stock price. If investors enjoyed a "Welch premium" in GE's salad days, it would seem as if they're now suffering an "Immelt discount."

Look again, though, and you'll see the dynamic has changed recently. Immelt is earning grudging respect from a growing cadre of GE-watchers who credit him with giving the company ballast during turbulent times. After all, the Welch era coincided with the longest bull market in U.S. history, while challenges during Immelt's early tenure have included a bear market, a flagging global economy, terrorist attacks, corporate scandals, and war. In his letter to shareholders in GE's 2002 annual report, a chastened Immelt (who wasn't available for an interview) conceded: "This was not a great year to be a rookie CEO."

DIFFERENT QUALITIES. Yet reflecting -- and contributing to -- Immelt's new stature is a recent rally in GE's stock from a recent low of $22 in mid-February (almost at its 52-week low of $21.30 of last October) to around $29 a share, a 30% gain.

The reason: Immelt has been doing a lot of things right, as far as investors are concerned. He has stabilized some of GE's most troubled divisions, including reinsurance and Power Systems. First-quarter results weren't stellar, but at least they went in the right direction, say analysts (see BW Online, 5/2/02, "What GE Needs to Keep Rising"). And by the second half, provided the economy cooperates, analysts expect earnings growth to begin anew.

While Welch had vision and charisma, Immelt emphasizes goals like technology leadership, customer service, and cash-generation. And GE legions are learning to appreciate his comparatively low-key manner and openness -- a far cry from Welch's hard-charging style and feistiness. What Immelt lacks in charisma, he makes up for in confidence, thoughtfulness, and even a degree of humility, say those who follow the company.

MORE FOCUSED. "I don't think he feels the need to have the kind of shorthand mantras that Welch had," says Kerry Stirton, an analyst with Bernstein Research. Stirton notes that it took years for Welch's key management nostrums -- getting rid of the bottom 10% of performers each year or requiring that GE be No. 1 or 2 in a business or get out -- to infuse the corporate culture. "These things don't grow in a year."

Immelt's vision for one of America's most fabled companies is to build on GE's core strengths, especially in growth areas like water filtration, medical imaging, and security. He talks frequently about the benefits of innovation and is investing heavily in research. Plus, analysts credit him with a more focused acquisitions strategy than Welch had.

The most recent of GE's industrial deals was its Apr. 30 purchase of privately held International Fiber Systems, which makes fiber-optic transmission systems and will beef up GE's growing portfolio of electronic security products. In the first quarter, deals made by GE's Consumer Finance unit included AXA-Auxfina/Cognifi in Belgium, the mortgage, sales finance, and home-improvement-loan portfolios of Britain's First National Bank, and Conseco's retail-sales finance business.

"I like what management is doing," says Richard Moroney, editor of the newsletter, Dow Theory Forecasts. "They seem to be putting their emphasis on areas where GE has a competitive advantage."

JACK'S LOST LUSTER. Immelt's growing credibility also stems from his willingness to allow investors to more closely scrutinize GE's finances. "Communication is much more open, and people feel earnings quality is improving," says Stirton. "Reestablishing that trust level is a very important part of the story in this post-Enron, post-Tyco era."

In stark contrast to Welch's decades-long string of double-digit earnings growth, GE under Immelt has suffered declining earnings and revenues. Many of its cyclical businesses slumped, along with GE's stock price. If investors enjoyed a "Welch premium" in GE's salad days, it would seem as if they're now suffering an "Immelt discount."

"In addition to the obvious challenges of a slowdown, Immelt has also had to deal with the aftermath of Jack Welch, most of which has to do with the whole corporate trust issue," says Peter Cohan, an investment strategist and GE shareholder. "He has had to clean up the accounting, make it easier to understand GE Capital, do some work on compensation and board structure issues. And he has done a good job with that."

MINI-PREMIUM. Still, the stock is far cry from its peak of $60 in August, 2000, not long before Welch announced his eventual retirement. The famed Welch premium contributed to GE's stock being priced at an average price-earnings ratio 60% above that of the S&P-stock index, figures Sonya Thadhani, a portfolio manager at Foster City (Calif.) investment firm Bailard, Biehl & Kaiser. By February this year, that premium looked more like an Immelt discount of about 25%.

Now, however, Immelt has earned back a premium -- only about 5% over the S&P 500, but a premium nonetheless. "It won't get back to 60%," says Thadhani, "but just crossing over into the premium territory is significant," she says.

In many ways, the days of CEOs being glorified as masters of the universe likely belong to a bygone era. "Investors have become pretty hard-nosed," says Stirton. "They no longer care about softer elements like personality premium and momentum that were popular in the late '90s. They just want to know how fast a company is growing, what its cash flow is, where the risks are, and that its accounting is clean."

HELP WANTED. Cohan believes GE's premium to the S&P always had more to do with its record of consistent double-digit earnings growth than it did with its former CEO per se. "Welch's charismatic personality encouraged myth-making. But if the earnings string had stopped, the myth wouldn't have held up," he says.

For Immelt to build on investors' respect, he'll have to figure out how to get giant GE to achieve reliable earnings growth year after year. Clearly, he'll need the economy to cooperate, says Cohan, who admits to being frustrated that the stock is so far off its all-time high. But he's not selling now -- and he's rooting for Immelt. "I'd like to see him make his mark and really get the stock price up."

It has taken awhile after the Welch era ended for Immelt's more subtle strengths to emerge. But to many observers, he's increasingly looking like a good choice to lead GE in the new era.


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