General Electric (NYSE:GE) has been thoroughly whooped twice in the past 15 years: first in 2001, when famed CEO Jack Welch stepped down just days before the September 11 terrorist attacks; and second in 2008, when the financial crisis floored the entire economy and tried to bring GE Capital down with it.
The company’s stock price reflects the damage. Shares peaked in value in July 2000, when they averaged $57.81 apiece. By July 2002, the stock was worth $24.65 per share, a 57 percent decline. Under the stewardship of Welch’s successor, Jeff Immelt, shares marched to $41.40 in July 2007 before falling over the price cliff of the financial crisis. Come January 2009, shares bottomed out at $10.11, the same price they were in 1995.
Shares have recovered somewhat since then, but at around $26.50 in the middle of May, the stock is just about where it was in July 2002, when it hit bottom in the wake of Welch’s departure and the terror attacks. If the market is a reflection of the business (however twisted it can get sometimes), GE is no better off today than it was a decade ago.
From a revenue standpoint, GE is worse off today than it was just five years ago. The company reported consolidated revenues of $146 billion in 2013, down about 5 percent from $153.7 billion in 2009. Consolidated net earnings of $13 billion are up about 18.2 percent since 2009 but have declined in each of the past two years.
For many investors who have been with GE through the turmoil, the company appears battered, slow, and often too big for its own good. The company is a leviathan with operations in more than 100 countries around the world — GE builds everything from consumer electronics to jet engines to medical imaging devices. Diverse, yes, but bulky, and the company has been criticized for its weight.
Immelt has also been criticized for his leadership of the company. Granted Immelt had big shoes to fill, but shares of GE are down about 32 percent since he took office in September 2001. The S&P 500 is up nearly 72 percent, and the Dow Jones Industrial Average is up about the same amount over the same period.
Despite all this, there are still good reasons to be bullish on General Electric for the long run. Here are a few of them.
One of the most attractive things about GE is its focus on infrastructure. The company appears to have observed that the world is developing at a frenetic pace and has concluded (correctly) that everyone from consumers to businesses to governments will need innovative tools, technology, and ideas in order to keep up.
These things fit under the broad umbrella of infrastructure, and GE builds them all. In its 2013 annual report, GE billed itself as not just the largest but the most competitive infrastructure company in the world. Assuming this is true and GE is the strongest horse in the industrial race — a 15.7 percent industrial segment margin supports the claim — then the company is sitting pretty. According to Immelt, “Investment in infrastructure is expected to reach $60 trillion by 2030.”
That’s a big pie, and General Electric is betting that it can take a big slice of it. “Our goal,” Immelt wrote in the company’s 2013 report, “is for infrastructure earnings to be 70% of GE’s total,” with the remaining 30 percent tied up in the GE Capital unit.
Immelt argues that GE’s size is actually an advantage when it comes to infrastructure. In order to truly compete at a global scale, you have to be massive. GE pulled in more than $100 billion in revenue in 2013 from infrastructure projects. Moreover, GE is expecting enormous demand for infrastructure in emerging markets like Africa, where the company expects to grow 30 percent annually. There are few other companies with the resources and expertise necessary to achieve this kind of growth.
Innovation like mana — some kind of pervasive capacity to produce new ideas and remain relevant or competitive. It’s hard to measure, sometimes expensive to foster, and often difficult to deploy (just because an idea is new doesn’t mean it’s good). Still, most businesses live and die by their ability to innovate, and GE is no different. All the scale in the world won’t matter if you don’t have the right ideas.
“We are consistently innovating inside GE,” Immelt wrote in the 2013 letter. ” In an ‘efficiency-starved’ world, our innovations are focused on productivity. We are investing in three initiatives that can deliver big gains in productivity for our customers and GE.”
These three initiatives — regarding analytics, advanced manufacturing, and energy — are significant by themselves, but the broader picture is just as important. GE is proactive about innovation and invests between 5 and 6 percent of revenue back into its products each year. Better yet, the company has six dedicated research centers around the world geared specifically toward this goal.
General Electric has institutionalized innovation, which helps the company, as Immelt puts it, “deliver the best technology at every price point with high margins.”
3. Backing away from what doesn’t work
Selling NBC Universal was the right thing to do, but GE — and Immelt in particular — has taken a lot of heat for the move.
GE gained control of the company, just NBC at the time, in 1986, when it acquired Radio Corporation of America (RCA) for $6.4 billion. NBC was merged with Universal in 2004. In 2011, GE sold 51 percent of the network to Comcast (NASDAQ:CMCSA), with the remaining 49 percent going in 2013. To Immelt’s credit, he managed to accelerate the deal, which was initially expected to be completed in stages in the seven years following the initial sale.
One of the major criticisms of the sale is that it simply came too late. GE appeared to never fully grok the television and entertainment market, and NBC Universal struggled under the company’s stewardship. Between 1986 and 2011, NBC fell from being the top-rated television network to fourth.
GE’s sale of NBC Universal should be a positive for the company moving forward, and the company’s willingness to back away from what doesn’t work will be an important part of its long-term success. As large as it is, GE does not necessarily have the flexibility to both lead the industrial market and seriously compete in something as different as the television and entertainment market.