In early 2002, General Electric's board gathered in Salt Lake City for the Winter Olympics, eager to take in events broadcast by GE's NBC...
In early 2002, General Electric’s board gathered in Salt Lake City for the Winter Olympics, eager to take in events broadcast by GE’s NBC television network. The board also met to plot the company’s financial future amid declining stock markets and and corporate scandals.
By the end of the conference, the board approved a plan by new Chief Executive Jeffrey Immelt and Chief Financial Officer Keith Sherin to realign GE’s financing arm, GE Capital, by slashing short-term debt.
Today, investors say the new approach worked. It has helped restore GE’s net income growth to at least 10 percent annually, a pace investors grew accustomed to under former CEO Jack Welch’s leadership.
And the Fairfield, Conn.-based conglomerate, the world’s largest company by market value, has preserved its top status within the $5 trillion U.S. credit market; GE is approaching its 50th anniversary as a triple-A-rated company, one of six U.S. corporations with the status.
“Immelt has two difficult years behind him, and a lot of things are turning positive,” says Rittenhouse Asset Management’sJohn Waterman, which owns more than 8.2 million GE shares.
GE’s stock price has yet to reflect the good news. GE shares has declined about 10 percent since Immelt took over in September 2001. But Immelt, 49, says GE’s stock price will rebound. “Our revenue’s great, and our earnings are great. The stock will follow.”
Investors such as Jim Zhao, who advises fund managers at Federated Global Investment Management in New York, agree.
“That’s the frustrating part. You just have to be patient and hope the stock recovers from here,” Zhao said.
The greatest adjustment Immelt has made was weaning GE Capital from tapping the capital resources of the parent company, allowing him to operate various units as if they were standalone corporations.
Before Immelt was named CEO, Moody’s Investors Service and S&P based GE and GE Capital’s rating on the promise the parent company would funnel money into the finance unit when necessary.
After Enron’s collapse in late 2001, the rating firms questioned GE Capital’s dependence on its parent. Gregory Hahn, chief investment officer at Oppenheimer, says he was concerned that GE’s ratings (AAA from S&P and Aaa from Moody’s), the highest a company can get, were in jeopardy.
“With everything that was going on in 2001, financial statements being called into question, it was a really scary time in the capital markets.”
To protect the company’s credit status, Immelt, Sherin and their finance team — GE Treasurer Kathryn Cassidy and GE Capital CFO James Parke — cut the share of short-term-debt holdings in half to 23 percent of the total. They also altered the proportion of debt to equity within the finance arm’s assets.
Immelt has been on a buying spree, adding more than $60 billion in acquisitions since becoming CEO. And he has shed about $25 billion in lower-return businesses, including most of the insurance assets built under Welch.
In 2004, total revenue was $152.9 billion, up 14 percent from 2003 and 21 percent from 2001.
In 2004, profits totaled $16.8 billion, up 11 percent from a year before and 22 percent from 2001.
GE’s third-quarter 2005 earnings climbed 15 percent to $4.68 billion, the fourth straight quarter of at least 10 percent profit growth, the company reported Oct. 14.
“We like the direction,” says John Augustine, chief investment strategist at Fifth Third Asset Management in Cincinnati, which owns more than 12.8 million shares.
“This is the first year in three that the company’s going to see double-digit earnings growth.”