GE not bringing good things to life

CEO Jeff Immelt is talking about a 'reset' that should help GE, but investors are tired of GE Capital's poor performance. Stock is Dow's worst performer this year.

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By Paul R. La Monica, editor at large

Shares of General Electric have bounced back in the past few months as the broader market has rallied. But the stock is still the worst performer in the Dow so far this year.
Did Bernard Madoff receive a fair sentence?
  • Yes
  • It was too harsh
  • No penalty is severe enough
If it walks like a bank...
GE's capital unit ranks as the sixth largest financial firm by assets and equity
Company Assets ($bil) Equity ($bil)
Bank of America 2322 240
JPMorgan Chase 2079 170
Citigroup 1823 146
Wells Fargo 1286 107
Goldman Sachs 925 64
GE Capital Services 636 61
Morgan Stanley 626 49
PNC 286 29
US Bancorp 264 28
SunTrust 179 22
Source:Citi Investment Research

NEW YORK ( -- They say that General Electric is a pretty good barometer of the economy. If that's the case, the economy does seem to be improving -- but it's still in pretty lousy shape.

With two trading days left in the first half of the year, GE (GE, Fortune 500) is the worst-performing stock in the Dow Jones industrial average. Shares are down 27.5% through Friday's close.

It's been a rough couple of months for GE investors. The stock ignominiously flirted with penny stock status earlier this year, hitting a 52-week intraday low of $5.73 a share in early March.

Sales fell 9% in the first quarter and profits plunged 35%. GE even lost its prized perfect credit rating in March when Standard & Poor's downgraded it from AAA to AA+. All that has led to increased speculation that the company may eventually have to split into pieces.

But the stock, like many other blue chips, has staged a remarkable rally in the past few months. Shares are up more than 65% since the market's early March lows.

CEO Jeff Immelt has said numerous times in recent weeks that he thinks the worst is over and that the economy is finally turning around. He seems particularly fond of saying that the world has been "reset" and that it's time for a new cycle of growth to begin.

So what will the second half bring for GE? Has the economy been reset? And if so, will that mean that GE and the broader market will continue to climb?

In many respects, a lot will depend on what happens with the credit markets.

Although GE still is one of the world's largest industrial conglomerates -- making everything from jet engines, wind turbines and ultrasound machines to mediocre television shows on the ratings vacuum that is NBC -- GE's stock has mainly been driven in recent months by expectations for its massive finance unit.

GE Capital Finance accounted for more than a third of the company's total revenue in the first quarter and about a quarter of GE's operating profits. The unit posted a 23% decline in revenue and 58% drop in profits in the quarter. The real estate segment was particularly hard hit, with the division losing $173 million.

It's hard to imagine how GE can truly recover unless its finance unit starts to turn around. And it's debatable if that can really happen in a material way as long as the company has strong ties to the consumer finance market.

With unemployment likely to hit 10% sometime this year, many bank analysts expect loan delinquencies to keep rising, which should hurt bank profits. And let's call a spade a spade. GE, in its current structure, is essentially a bank. As the chart to the right shows, the GE Capital unit's assets trail only industry giants BofA (BAC, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Citigroup (C, Fortune 500), Wells Fargo (WFC, Fortune 500) and Goldman Sachs (GS, Fortune 500).

Talkback: Do you think GE should break up? Is the age of the conglomerate over? Leave your comments at the bottom of this story.

In fact, Citigroup analyst Jeff Sprague pointed out in a report Monday that GE Capital Services could be forced to convert into a bank holding company and separate from the industrial part of GE if the current financial regulatory reform plan proposed by President Obama is approved by Congress.

Sprague conceded that it's highly unlikely that the Obama plan will pass in its present form and added that GE may be able to successfully lobby for some sort of grandfather clause that would allow it to continue owning GE Capital.

In a statement, GE spokesperson Anne Eisele said "it is too early to speculate on the full impact of regulations yet to be finalized or adopted" but added that "banking reform legislation has traditionally recognized the need for grandfathering existing structures and activities."

Nonetheless, Sprague thinks GE's finance unit is likely to face tougher restrictions at some point in the not-so-distant future since the company has received federal assistance by tapping the FDIC's loan guarantee programs for banks. The company could also be required to raise more capital, Sprague wrote.

With this in mind, Sprague noted that it may no longer be worth it for GE to remain as big of a player as it is in banking.

"We argued more than 2 years ago that GE should exit consumer finance and real estate. We still see little or no strategic rationale to be in those businesses," Sprague wrote.

He said that there is some "strategic logic" in being a commercial lender given its status as an industrial giant. But he added that as long as GE is a leader in other aspects of finance, the stock could be penalized by the market since he believes "it will be a long time before investors forgive and forget the pain of this financial crisis." (Working for Citigroup, Sprague should know this firsthand.)

GE's Eisele said that the company "has anticipated and planned for increased regulation of financial institutions" and added that GE is "committed to our current business model and to retaining GE Capital as an important part of our business."

One fund manager that owns GE said selling parts of the finance unit now would not be a good idea though. That's because GE would likely only be able to fetch distressed prices for the assets.

"At this point it does not make sense to get rid of finance. It's something they should have thought about couple of years ago," said John Snyder, manager of the John Hancock Sovereign Investors fund.

The shame in all this is that outside of GE's finance woes and the continued underperformance of its NBC Universal media unit, there's much to like about the company.

Profits rose at its energy infrastructure and technology infrastructure units thanks to strong sales of thermal and aviation equipment. If the economy is actually in a recovery, those divisions should continue to do well.

"There is probably not much downside to the stock now. Investors would be making a mistake at this stage, particularly given all the negativity towards the company, to make a big bet against GE," Snyder said.

Still, some big investors appear to be fed up. According to figures from FactSet Research, Bill Miller's Legg Mason Value Trust sold its entire position in GE during the first quarter. So did other well-known funds such as the Federated Kaufmann fund and Pioneer fund.

GE will face a crucial test when it reports its second-quarter results July 17. If the worst really is over and Immelt's reset has in fact begun, investors will want to see proof of that.

Currently, analysts are skeptical. They are forecasting that total sales for GE will be down 10% from a year ago and that earnings per share will plunge 54%.

And another fund manager who still owns the stock said he's running out of patience.

"People are tired of the GE Capital unit. It would behoove the company to extricate themselves of most of it somehow," said James McGlynn, manager of the Calvert Large Cap Value fund. "GE was designed for the 1990s, not this century. The company is just too big to manage."

Talkback: Do you think GE should break up? Is the age of the conglomerate over? To top of page

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