How great of a CEO is Jeff Immelt of General Electric Co. (GE) exactly? In a May 2012 column, Forbes listed Immelt as the fourth worst CEO of a large publicly traded American company, saying he had "no vision to propel GE's growth, and should have been gone by 2010," after GE's stock dropped from $60 in 2000 to $19 in 2012 (2/3 from when Immelt took the CEO position). Is he that bad or is the picture more nuanced? Let's take a closer look.
Over a career of a CEO it might be possible to judge performance based on the value created for shareholders of the companies involved.
Over the short term this is most likely not a very reliable proxy. If you can judge the ability of CEOs more accurately and early in their respective careers, you might be able to gain an edge on the market. Currently I'm intrigued by the possibilities. With the help of an excellent chapter in The Manual of Ideas, called Jockey Stocks: Making Money alongside Great Mangers, I constructed a spreadsheet to evaluate CEO performance. In this article I'll share my research on Jeff Immelt with you.
The numbers on Jeff Immelt
|GE, Jeff Immelt tenure||return on capital %||return on equity %||$ book value (per share)||margin profile %||asset turnover %||capital expenditure trends $|
Return on capital
Return on capital is a very interesting metric to evaluate a CEO. In this particular case, I don't like it that much because of the large financial arm of General Electric. The numbers look very much like those of a large bank. For a large bank the numbers aren't terrible over this particular period (0,07% on average), but when stacking up performance against a diversified industrial conglomerate like Honeywell, they are disappointing. The diversified operations make it hard to rely on a single simple metric.
Return on equity
Perhaps return on equity is the ultimate metric to evaluate performance. It includes the CEO's ability to manage leverage and provides us with a more complete picture of asset allocation skills. Over a long period of service, like ten years, I think it is a reliable yardstick. Note that a longer period also allows for CEOs to dramatically alter the course of a company and enter and/or exit particular industries.
Without the development of book value or a similar metric the performance picture isn't complete. By itself it can be greatly deceiving but in the complete profile it helps us judge the effectiveness of a manager. I'd value tangible book value a lot higher compared to intangibles. Immelt succeeded in growing book value from $7.98 to $12.13 which isn't bad.
The margin profile is an extremely interesting metric and definitely something the CEO has influence on. General Electric is showing very healthy margins, as it should with its glacial asset turnover. I've chosen to pick operating margins instead of gross margins as the CEO can exert a little more control over this number. In the early years of Immelt's leadership, before the financial crisis, the profile looked great. Unfortunately it hasn't fully recovered.
Asset turnover is quite useful to judge growing companies and less useful in this particular case of the mature behemoth that General Electric is. However, in a complete profile to review CEOs it has its place. You also might want to review the number in relation to peers.
Capital expenditure trends
It's useful to observe capital expenditure trends to judge a CEO's capability of finding additional areas to invest but also his ability to return cash to shareholders.
Comparison with Honeywell
Judging a CEO by the numbers of its company is not easy. An evaluation improves when evaluating the numbers in light of the numbers of a competitor achieved over the same period. To compare Jeff Immelt's results, let's see how they stack up against those of Honeywell International Co (HON). I've picked this company as it is a large competitor of General Electric and its CEO, Dave Cote, serves since 2002.
|Hon, under Dave Cote||return on capital %||return on equity %||book value (per share) $||margin profile %||asset turnover %||capital expenditure trends $|
Funny detail: Dave Cote has also served as CEO of GE appliances. Comparing the two CEOs on return on capital doesn't seem fair and isn't very helpful to gain information from this analysis. However, comparing them on ROE is quite interesting. Over the 10 year period that Immelt has been leading General Electric, Honeywell International ROE has averaged 21.26% under the leadership of Cote. General Electric averaged 14.59% ROE under Immelt. Both are solid results, but Cote's record is stunning. Immelt, however, has one of the largest asset bases in the world to work with. General Electric's market cap of $281 Billion dwarfs the $71 Billion of Honeywell International.
It's clear that Immelt managed to create a lot of shareholder value over the years. Cote managed to post a stunning record of 20%+ ROE over ten years. Let's review how the market judged both their performance:
General Electric underperformed the market during the credit crisis in 2008 in quite a dramatic way. Otherwise, it closely follows the result of the S&P 500. Honeywell International underperformed dramatically in 2008 as well, but has since destroyed the market. The gap widening fast during 2013.
Results vs Peer Group
Perhaps comparing results against a single peer is not entirely fair because it might have performed exceptionally well. Dave Cote might be making Immelt's results look much worse than they actually are. Therefore I've also set up a chart comparing returns with a peer group of: United Technologies Corp (UTX), 3M Co (MMM), Honeywell International and ABB Ltd (OTC:ABLZF)
Unfortunately for Immelt, this doesn't help him much. General Electric's performance does not come close to that of the other laggard 3M over the timeframe. Although investors in ABB needed nerves of steel its results blow away that of all competitors.
Immelt is faced with the incredibly challenge of creating shareholder value at a pace equal to that of the market while managing one of the largest asset bases in that market. Surely this isn't easy. Immelt does not compare favorably to Dave Cote of Honeywell International and the market does not look favorably on the developments at GE during his tenure. Both compared to the market in general and when compared to a peer group of large competitors. By no means Immelt appears to be incapable or lacking in ability but his performance does not inspire investment either. At this point my research leads me to the conclusion that I wouldn't invest in General Electric based on the leadership of Jeff Immelt.