Should GE fire its CEO?
Posted
Jun 24 2008, 04:05 AM
by
Charley Blaine
Rating:
If you're a GE shareholder, you've probably been pondering the idea since April 11, when the company shocked investors around the world by reporting a first-quarter profit decline that absolutely no one expected.
Since then, there's been chatter in blogs (See this from George Yared) and message boards about whether Immelt's tenure should end. Some posts are on MSN Money.
The New York Times noted on Sunday that Wall Street seems to have fallen out of love with GE. Douglas McIntyre, a Top Stocks partner blogger, says the company is in need of a major change in direction. "It's a dog of a stock," he wrote this week.
He's got a point. The stock, based on Monday's closing price of $27.40, is down 11% this month and 26% on the year -- sixth worst of the 30 Dow stocks. (Citigroup, the fifth-worst Dow stock this year is off 35% or so.)
GE finished 2006 with a small gain and 2007 with a small loss. It's down nearly 31% since Immelt took over from the legendary Jack Welch on Sept. 7, 2001, four days before the Sept. 11, 2001, terror attacks.
The first-quarter profit miss was more than embarrassing. The stock sank nearly 13% after the report came out and led the Dow Jones Industrial Average to a 257-point loss in the process.
But even after no less than Welch, who hand-picked Immelt to succeed him, said he'd "get a gun out and shoot him" if GE had another miss, the stock has fallen an additional 14.6%. On June 12, it fell under $30 for the first time in four years.
GE is expected to report second-quarter earnings of 53 cents a share on July 11, unchanged from a year ago. No wonder that, a week ago, JPMorgan analyst Stephen Tusa, a longtime GE fan, downgraded the stock to neutral from overweight.
So, what's the problem? Clearly, investors have been in no mood to forgive after the earnings miss. Worse, four of its six big business units showed profit declines from a year earlier, and its financial-services businesses wrote down $1.3 billion in assets. And some businesses are vulnerable, such as GE's aviation business, a big supplier of jet engines to airlines. The question is whether there will be any domestic airlines left to buy the engines; foreign airlines at least still seem to ordering new planes. The appliance business is dependent on the housing industry. The housing business is lousy; so the appliance business is on the block.
There's another problem. GE is so big and has so much going on that few people can understand it. (And , yes, one hears the same thing about American International Group, Citigroup and a host of other companies -- all of which have seen their stocks plunge in the last 18 months.)
So, the theory goes, as Jack Flack suggested on Portfolio.com, GE should slim down get rid of, say, NBC Universal, the shop that brings you the Universal Theme Park, Meet the Press and Saturday Night Live. And sell the healthcare business, which makes sophisticated imaging machines and the like. And maybe even all those financial businesses.
Then, GE should concentrate on GE Infrastructure, which makes diesel locomotives, oil and gas equipment, electric turbines, wind-powered turbines, electrical-distribution equipment, water purification plans, even the jet engines.
Whether Immelt will engage in such radical surgery is hard to say. If NBC goes, it will be after the Olympics. And he's given no signal he or his board are interested in such big moves.
Flack also suggested Immelt and Welch talk about how Welch will keep quiet. That raises a third problem. Welch became a near-deity during his tenure, with the stock rising something like 4,000% during his tenure and countless fawning magazine cover stories. The stock fell 35% between its peak on Aug. 28,2000 and the day he retired. It's a tough act to follow.
What Jeff Immelt needs is time. But he also needs to avoid surprising The Street again. Or Jack Welch. So, GE's second-quarter report will be very important. If GE misses 53 cents a share, his days will be numbered.
Update, 7 p.m. ET: Reader al mills wondered how much Immelt was paid in 2007. The answer from the GE proxy statement was $19.6 million in salary ($3.3 million), bonus ($5.8 million), stock awards ($9.8 million) and roughly $480,000 in other compensation, including use of company aircraft ($235,727). The 2007 total was 9.5% higher than the 2006 total of $17.9 million.
