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Summary

  • GE's strategy does not work in an atmosphere of low interest rates.
  • GE is not changing its industrial strategy. In fact it's accelerating it.
  • Wait for interest rates to rise before nibbling at this name.

On the CNBC "Squawk Box" set, where Jim Cramer works most mornings, the idea of investing in GE (GE) has become a punchline. Other anchors mention the name and he chortles. It's hard to blame him. GE shares have not even recovered from 2000's "dot-bomb," when they traded near $60, let alone the Great Recession, before which they peaked at about $40.

So far GE stock is down for the year and has lagged the S&P 500 throughout the recovery. It has become a widows-and-orphans stock, a yield stock currently delivering 3.34% of its value in dividends each year.

GE's most recent quarter showed sales of $36.23 million, and net income of $3.54 billion, 35 cents a share, against sales of $35.06 billion and net of $3.13 billion, 31 cents per share, in the same quarter a year ago. More than half the net income, 22 cents a share, went right back out as dividends, giving the stock a yield of 3.35%. That's OK for income, but where's the growth?

The problem for GE is structural. CEO Jeff Immelt has gone all-in for an industrial goods strategy, essentially abandoning financial and consumer markets where growth is stronger and where technology can get a bigger payback.

Just this summer Immelt has jettisoned the company's consumer retail finance unit as Synchrony Financial (SYF), and is now preparing to sell the company's appliance business.

Small wonder that almost half the analysts who follow GE now have it as just a hold.

This does not need to be fatal. Right now GE's revenue per employee stands at $477,257, putting it in the middle of the pack among S&P companies and near the top of the industrial sector. It has been higher, peaking at over $602,000 in 2008.

The problem is that at a time of low interest rates GE doesn't get the leverage from money that consumer-oriented product companies get. This should change as interest rates rise, but until they do the company is stuck with what is, for investors, a losing strategy.

In the industrial market, there is little leverage of people. Most of the work in building a jet engine, healthcare software, or other industrial goods is still hand-work. You can't just build something once and ship the design off to China. You can't write a hospital IT system once and sell it millions of times. Even when the company achieves a breakthrough, as it recently did in 3D printing, replacing sintering with lasers so it can use lighter materials, it has limited applicability, because GE doesn't make millions of jet engines every year.

As noted, this changes when interest rates rise. The leverage achieved with huge amounts of capital, which GE continues to have, becomes greater when the cost of money goes up. If the Fed decides to make a move on interest rates, look to get into GE before the crowd. Until then, it's dead money.

Source: GE Problems Are Structural But Are They Permanent