- Although shares are still down close to 50% since their 2000 peak, the stock has, nonetheless, been one of the best performers on the market since 2009.
- Immelt, in his 13th year as CEO, is working to strengthen GE's weak parts by molding them in areas where the company outperforms.
- On the basis of what the company has achieved and can still achieve with Alstom, Immelt deserves more time and GE deserves investor patience.
My recent coverage on everything related to industrial conglomerate General Electric (NYSE:GE) has reminded me that in the stock market, there is no such thing as "forgive and forget." Rather, when an investor is scorned with losses, absent making them "whole" (and perhaps a slight gain), there is nothing that a CEO can do to regain the trust.
To that end, the legacy of General Electric's CEO Jeff Immelt, who has come under fire of late, appeared sealed. That is, of course, one has been a General Electric shareholder for more than five years. My recent article, which suggested that Immelt is one of the best CEOs on the market, struck a nerve with several readers.
While Immelt is no Steve Jobs, consider that during the past five years, the stock is up 145%. During that span, Immelt has closed several accretive deals, including selling NBC Universal to Comcast (NASDAQ:CMCSA). Immelt got the media giant to accelerate the time frame of the deal. Recall, the initial spin-off to Comcast, which took place in 2011, still left GE with a 49% stake in NBC. So the deal was not expected to close for seven years. As it stands, Immelt got GE $16 billion in cash 5 years before it was due.
And let's not forget, during the past five years, Immelt has steadily grown the company's cash, which includes a stash of close to $60 billion overseas. And when you factor the consistent increase in the company's earnings and dividend, it's hard to see how Immelt's job can be at stake at this point, especially since the company is now on the verge of closing its biggest acquisition yet in Alstom (OTCPK:ALSMY).
But before Alstom, investors discount Immelt's decision to buy Lufkin Industries, an oilfield and power transmission equipment builder acquired by GE for $3 billion. The deal was criticized as having been too expensive. But Lufkin was a profitable business generating more than $1 billion in revenue. GE then spent $4.3 billion on Avio, an aerospace-propulsion specialist headquartered in Italy that generated $2.4 billion in revenue.
There are calls for General Electric to break itself up because of what is perceived as "slow growth" businesses. There's a consensus among investors that GE is "too big." But despite these recent talking points, the company has not performed as poorly as some of the so-called experts suggests. How else can a company of GE's size deliver 12% earnings growth in its industrial segment without strong management.
In fact, the company posted 14% revenue growth in both aviation and power/water segments, its two largest industrial businesses. GE's oil and gas division posted a 27% revenue increase. As strong as these numbers appear, I don't believe management, particularly Immelt, has gotten enough credit.
The company's strength in businesses such as jet engines, gas turbines and oil industry equipment offset weakness in areas such as transportation and healthcare. Excluding one-time items, the company delivered operating earnings of 33 cents per share, topping average estimates of 32 cents per share.
In the process, Immelt has done a respectable job ridding the company of poor-performing businesses like the company's GE Capital segment, while transitioning GE to become a more focused operation, specifically returning GE back to a traditional manufacturing operation. That segment just posted 8% revenue growth, and is by far GE's strongest.
Given the breadth of GE's end-markets and its size, which it has achieved from various acquisitions, there have been complaints about GE's weak organic growth. This is the metric that measures a company's operational performance using only internal resources and excluding events like acquisitions.
Consider, General Electric delivered organic growth of 8%, twice the average estimate. What's more, that the company posted a profit margin of 13.4%, which expanded by 50 basis points, suggests that management's decision to focus on its industrial segments is paying off.
This demonstrates how well Immelt is executing on both his global growth strategies and productivity initiatives by reducing costs. And when you factor in the confidence shown in management's guidance, which calls for 10% growth in industrial profits, this is a company that is operating on all cylinders.
Although shares are still down close to 50% since their 2000 peak, the stock has, nonetheless, been one of the best performers on the market since 2009. Immelt, in his 13th year as CEO, is working to strengthen GE's weak parts by molding them in areas where the company outperforms. On the basis of what the company has achieved and can still achieve with Alstom, Immelt deserves more time and GE deserves investor patience.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.
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