Jeff Immelt's GE: A Study in Corporate Leadership

On Wall Street, the adage that savvy investors should do the opposite of more obvious appearances, taking advantage of reality’s lag time, has perhaps never been truer than now. That’s why many investors have long practiced the strategy of buy on analysts’ sell recommendations, sell on analysts' buy recommendations. And that’s why buyers have been snapping up financial stocks despite the fact that many banks remain perilously close to short-term danger in the fractured American economy.

The simple reason for this is that once something is completely and widely en vogue in the money-making realm, like buying GE’s stock was in the late 1990s, or buying second and third homes as an investment strategy was four years ago, the pendulum has probably already swung back the other direction. Most people just don’t know it yet, though.

That’s why I wrote my newest book Jeff Immelt and the New GE Way, and that’s why I think study of the leader and the business is more important today than ever before. Sure, GE’s stock has been battered worse in the past year than most others in the S&P 500. Yes, the image of Immelt and the once-shiny company now has a taint of tarnish because of too much debt, questionable exposure in its capital division, and the about-face decision earlier this year to cut the dividend by two-thirds.

But what if that is just the momentary more obvious?

Studying corporate leaders and the companies they run in a frenzied, bubble market like the one America experienced leading up to 2001 is easy. Bashing them in a rabid down cycle, without taking the time to stop and take a deeper look, is just as easy. Note a recent article by Reuters which asked if the legendary investor Warren Buffett is losing his touch because his financial miracle wand is no longer so effective in the economic crisis.

Such a suggestion is foolish, of course. Buffett is just a bull caught up in a stifling bear market. And he is human after all. Business is risk, even for Buffett, and risk is fraught with pitfalls, some big enough to trip up the likes of Buffett or Immelt when cycles drastically turn and debt becomes an enemy, not a friend.

The joke, of course, is not on Buffett, or even Immelt. The joke is on the investors who bought stocks like GE’s when it was trading at the height of the bubble with a price-to-earnings ratio in the 30s that was to be driven by a host of mature and well-wrung businesses handed over to Immelt by Welch. That was the time to sell, despite more obvious appearances.

Now, though, with fear ever-present as economic growth continues to run in reverse and the hint of a bull market by day sends chills through the night among tortured, angry souls who cannot figure it out, is the best time for investors to dig deeper into the styles and strategies of the most important leaders and companies, like Immelt and GE, determining where the quality is and where it is not for future investment returns.

One thing I immediately found when looking at GE is that when Immelt took over, he barely had a chance. The lofty price-to-earnings ratio had just one way to go, down. Factor in two hard recessions in eight years and one almost becomes sympathetic. Unless, of course, you are one who bought the stock near its high multiple. In this depressed market, GE’s shares are down from a 52-week high of $33.36, trading at just more than $13, with a price-to-earnings ratio of 8.5, as questions linger about the size of potential write-offs in its capital division and the future direction of the company in all divisions.

Many people are not happy about it, including Immelt.

But now, like never before, is the time to study and learn so decisions can be made outside of the more obvious trends. It’s the bottom, not the bubble, with likely just one direction to go. The question becomes, how far can leadership take it?

Immelt, of course, has made mistakes in his tenure as GE’s chairman and CEO. Like Buffett, or even Jack Welch, he is not beyond placing bad bets, or sticking with good ones too long. He certainly went too heavy and stayed too long in risky financial investments, including consumer credit cards and high-end real estate. The dividend took a hit, hurting the income of many long-time investors. But one should note that these same investors also pocketed some $40 billion in dividend payouts under Immelt’s leadership, which likely would not have been available were it not for profits earned by the now-questioned investments of GE’s financial division. In other words, many who have complained, including dividend-sensitive retirees, certainly benefited in recent years from payouts they otherwise might not have gotten.

What I also found in researching Jeff Immelt and GE transforming strategy is that he is orchestrating a global, layered business plan the likes of which we have not ever seen before. Investors could likely better understand GE when the company focused its business side on light bulbs and appliances. Those businesses still remain, yet Immelt’s signature has been busy reshaping GE into one of the world’s biggest problem solvers through its infrastructure divisions, providing energy, transportation and health care solutions in a broad, high-payoff scope.

He has the clout to sit with global political leaders. And when he does, Immelt opens up a book of diversified products and services including transportation, electric infrastructure and energy that he can sell and finance in-house. No other corporate leader in the world can do this.

How investors bet on the future from this bottom is certainly a matter of instinct, but I found that information in times like these matters far more than it does at the top, when everything seems obvious and easy.

As for Immelt, he knows he is on to something big, but he also understands the challenge: how effectively he and the company can deal with, manage and ultimately iron out the problems in finance so that the focus becomes almost entirely on GE’s industrial side of the business, with its capital division merely providing profitable, goal-oriented support.

And there’s something else: the direst forecasts may not be so dire after all. Appliances, a business GE remains firmly entrenched in, are suddenly looking much better, thanks to China’s consumer stimulus package, the bottoming of America’s housing crisis, and a sharp reduction in global appliance inventories. Similarly, consumer credit, which GE holds a big chunk of in its finance division, will no doubt suffer losses, but as housing bottoms and unemployment levels off, the worst-case scenarios may not be nearly so bad.

I found in my research and time with Immelt that he understands the challenge and the charge, clearly, and he fully accepts the pressure to deliver. I also found that he knows if he finishes the difficult task of properly reshaping GE, investors who got on board when the stock traded at a much more reasonable price-to-earnings ratio in single digits will be quite pleased with the company’s stock price returns going forward.

Comments

[User 408329:]

Your impression of Immelt appears to have been clouded by your interview with him. I spend considerable time researching and am a careful investor working with my stock portfolio, including GE. GE should have a very bright future, but all indications are that Immelt is not the right leader, or having the right agenda, to get a once great company back to that same level. Getting rid of Immelt would portray a positive change in the company's direction and be an immediate boost to GE's stock price. Stifling dissent at the last stockholder meeting is indicative of failed leadership that does not permit or accept constructive dissent. ef

May 06 10:19 AM

[ex GE'er:]

Yes, Jeff is a nice guy that is personable. That does not make him a good leader. He's had 8 years to make his mark, but check the stock performance over his tenure. It's not just the last 18 months. It has languished over the entire period, and he has done nothing to increase shareholder value or keep GE on top in terms of culture, most-admired companies, management development, or any other measure. Your assessment of his ability is clearly influenced by his personality. He's lost the faith of institutional investors because of his credibility problem. If the board had any sense, they would bring in Mark Hurd of HP.

May 06 10:44 AM

[big alfie:]

welch raped the company with his golden parachute. now immelt and his cronies cut the dividend instead of cutting his salary and the other executives. ge with what they have should be in the 50 dollar range.if we got a new board the possibility is there.

May 06 10:57 AM

[PastTense:]

"ultimately iron out the problems in finance so that the focus becomes almost entirely on GE’s industrial side of the business, with its capital division merely providing profitable, goal-oriented support."

No, Immelt is the guy who expanded in finance so that GE is more a financial guy than an industrial one.

GE should be split at least in two, finance being a separate company.

May 06 11:08 AM

[Emerald:]

Dave Magee offers up a self-serving GE article and is hardly objective. Welch ran the company on short term commercial paper and turned GE into a shadow bank, financing the buyers of its products. Bill Gross of PIMCO finally called this financing structure "insane". Trying to be masters of many different industries (banking, real estate, hard asset manufacturing) plays well to CEO ego's but rarely provides a sustainable business plan. GE did their best to hide the negative effects of the lending and real estate operations by smoothing earnings (i.e. selling off subsidiaries) over the last few years without getting out of the finance business. Cutting the dividend is a clear indication that this multi-faceted organzation is still too risky as a blue chip investment.

GE needs a makeover and their new "green" ads are simply corporate image making and not a true transformation of the company. The author states that once the economy turns around, the risky businesses that got GE into trouble will be wildly profitable. Perhaps, but what business or non-related businesses does this conglomerate want to be in to provide investors with a believable business plan. It's not the one the author says will be great. I still hold a few GE shares but sold the majority a year ago. Many of us are waiting to see if a "new" GE emerges before buying anymore.

May 06 11:25 AM

[Bronson Young:]

I agree with most everyone here. I do not think that Immelt is the right guy for the job. But I will admit that since I got in at $7.75 a share the stock has popped big time. I am very very long GE. I hope by the time that I am 40 the stock will be back in the $40 dollar range. This is still my favorite stock in my portfolio. I know they have their problems but GE is still king of the DOW. That has nothing to do with Immelt.

May 06 12:38 PM

[BerkeleyBob:]

If GE's appliance business is a bright spot, why did GE attempt to sell it off and apparently then abandon the notion? I took a loss on GE last year, have recently nibbled at a much smaller position at recent price levels. I am not sure that GE is out of the woods yet, and regard the stock as somewhat speculative, in spite of its run-up from lows in November 08 and March 09. It sure isn't a widows and orphans investment proposition.

May 06 12:52 PM

[pitboss33704:]

I have echoed the mantra of Jack Welch before in these environs when the subject of Immelt has come up - Immelt would not have survived more than a year or two under Jack's " Rank 'em and yank 'em " policy - the bottom 10% of management was subject to that annual digital - like exam and those who fell into that bottom tier were given a copy of the Home Game - Broom Immelt out the door now - He lost any semblnce of credibility with me and I venture a good number of other GE stockholders when he did the about face re. GE's dividend earlier this year - A lot of people reasonably relied to their direct financial detriment upon Immelt's representation about the safety of the then GE dividend - The implosion of GE Capital occurred entirely on his watch - Fool me once .........

May 06 02:28 PM

[dougsmithtr...:]

Cutting the dividend was inexcusable and a terrible broken promise. Clearly, that hurt the stock.

Still, it baffles me why the stock should be so low. GE has transformed itself into a responsible problem solving global organization poised to be most helpful in our near future: water, energy. As a stock holder who has stayed with the company thick or thin (mostly thin going on years now) let's hope for a recovery and no more broken promises.

-- Doug Smith

May 06 07:19 PM

[casey00001:]

I think there were two dunces in the class of managers "trained" under Jack Welch. Jeff Immelt and Bob Nardelli. Both have done diddly dick in their careers other than make themselves a bunch of money.

May 06 10:36 PM

[Ex GEer2:]

Immelt should restore dividend back end of comment.I am GE Retirie and they always said the savings and security was part of our three legged retirement stool.Social Securuty,Pension andSavings and security so when Immelt lowered Dividends he made the stool lop sided.ll you retired and working brothers and sister agree then put your comments on this blog and maybe mr Immelt read them and under stand we don"t like it..
GE 2

May 06 11:49 PM

[bbowen7:]

America needs "world class" manufacturing companies. GE has them in several key industries. It is too bad that they are wrapped up with a financial services company.

May 07 12:20 PM

[hwood007:]

If GE is your favorite, I wonder what the other one is? I still own some but it is not my farorite.


On May 06 12:38 PM Bronson Young wrote:

> I agree with most everyone here. I do not think that Immelt is the
> right guy for the job. But I will admit that since I got in at $7.75
> a share the stock has popped big time. I am very very long GE. I
> hope by the time that I am 40 the stock will be back in the $40 dollar
> range. This is still my favorite stock in my portfolio. I know they
> have their problems but GE is still king of the DOW. That has nothing
> to do with Immelt.

May 07 03:42 PM

[Bronson Young:]

LOL that's funny. But like I said I am very long GE. I have nothing but time when it comes to GE. I hear a lot of people that bash GE and bash Immelt, but those same people still own shares of GE. That is odd to me.


On May 07 03:42 PM hwood007 wrote:

> If GE is your favorite, I wonder what the other one is? I still own
> some but it is not my farorite.

May 14 12:55 PM