General Electric: Value Play or Stay Away?
General Electric*, the world's largest conglomerate with products ranging from light bulbs to turbines, has been rocked by controversies and dogged by slow growth during the tenure of Chief Executive Officer Jeffrey Immelt, dividing investors on whether the company's stock is a buy or sell.
Albert Meyer, manager of the Mirzam Capital Appreciation Fund , recalls a client who owned GE shares in 2007. Meyer's investment strategy shuns companies that have egregious executive compensation programs, so he dug into pay plans for Immelt and other executives. What Meyer found astounded him.
"GE exists for the benefit of the executives and the directors," Meyer says.
"The four executives I looked at received and realized total compensation of roughly $30 million a year during a time when the stock price declined and underperformed the S&P 500. Immelt totally underperformed and totally missed expectations."
Meyer made the right move for his client, as GE shares are down more than 45% since the beginning of 2007, before the financial crisis that crushed GE Capital, one of the company's many business units. While the finance unit has stabilized in recent quarters after Immelt shrunk it, GE's reputation has been tarnished in other ways.
In March, the earthquake and subsequent tsunami in Japan brought new criticism to GE's design of nuclear reactors at the crippled Fukushima power plant. That same month, The New York Times reported that despite earning more than $14 billion in profit last year, GE received a tax benefit and didn't owe taxes for 2010. That's as unemployment was stuck at nearly 10% after 8 million Americans lost their jobs in the recession.
And earlier this week, GE disclosed in a regulatory filing that it would more closely tie options granted to Immelt last year to performance metrics. This came after GE shareholders "expressed the view that additional performance conditions should be applied to Mr. Immelt's 2010 stock option award," according to the filing with the Securities and Exchange Commission.
One of the conditions Immelt agreed to would see 50% of the 2 million granted stock options vest only if GE's total returns meet or exceed that of the S&P 500 over the same period.
"The whole option thing is so crooked. It's so absurd," Meyer contends. "They should have performance linked to United Technologies , Berkshire Hathaway or another big conglomerate. The S&P 500 is mediocrity. Being above average is easy. A guy who takes that kind of money with such performance tells me he has bought into this whole culture."
GE spokesperson Anne Eisele disagreed with the characterization that the company's compensation plans were egregious.
While Meyer isn't alone in his view of GE's executive compensation, value investors see much potential in a stock that is up nearly 80% since the summer of 2009. The recent negative headlines, combined with a 57% drop over the past decade since Immelt took over from management guru Jack Welch, has made GE a favorite among those long-term investors.
"How can you be happy if you bought at the beginning of 2007 at $37? I can understand people's frustrations that way," says Russell Croft, manager of the Croft Value Fund (CLVFX).
Croft's fund has $426 million in assets with a 1.4% weighting for GE. "It hasn't been the best stock if you've owned it for ages, but over the last year or so it's had a nice return."
GE reported first-quarter financial results Thursday, with operating earnings climbing 58% to $3.6 billion, or 33 cents a share. The industrial conglomerate also raised its quarterly dividend by 1 cent a share to 15 cents.
Croft, though, says investors in GE shouldn't put too much weight on one quarter of performance. "Going into this quarter, we're not traders. We're investors," he says. "We can't get lost in the short-term noise. We'd go crazy. Every quarter, though, we get further along with clarity in GE Capital."
Robert MacDonald, associate portfolio manager with the Thornburg Value Fund (TVAFX), also counts GE as a top holding. The $4.8 billion fund has nearly 3% devoted to GE shares, as the company has fallen so out of favor, he says.
"Look at what GE used to be and how it was thought of in the late 1990s. It was considered the best company in the world" under Welch, he says.
"Over the last decade or so, it has gone from the top to the bottom. The truth is closer to the top than the bottom. We're at a point now where the market will start to realize that. The tax issue, executive comp, and Japan — those are things that will get a lot of coverage. But in the investment community, I don't think it really impacts the ultimate value of the stock."
While investors like Meyer criticize Immelt and GE management as overpaid given the company's underperformance, MacDonald says that he is encouraged by GE's recent execution.
"What's most important to me as a shareholder is that Immelt and the management team execute," MacDonald says. "If you listen to what Immelt laid out in the beginning of 2009, there was a focus on the company's core competencies. They would pay dividends, buy back stock, and be prudent with the cash they have and generate. It seems like they're doing a pretty good job of that."
As shareholders in GE, both MacDonald and Croft look at GE from two different perspectives. For MacDonald, he says investors may not realize that GE has always been a late-cycle business that will rebound a few quarters later than other companies. Now, investors are so skeptical and pessimistic, they're doubting there will be any pickup at all, he says. Even the industrial analysts are confused on GE, MacDonald adds.
"Industrial analysts look at the company, which is 30% to 40% financials, and they don't understand it and they're scared of it," MacDonald argues. "So everyone paints the whole thing with a negative brush. But the finance business is good and it's earning great returns at the moment. All of their competitors have gone away and they're writing business that has great returns."
Croft, on the other hand, looks at GE's valuation compared to peers like United Technologies and Honeywell . Croft points out that GE trades at 12 times next year's expected earnings "with a very powerful balance sheet." That's compared to Honeywell and United Technology, which are 13 or 14 times earnings.
"GE is a leader in technology and manufacturing. It has a world-class set of businesses," Croft says. "They're in areas that are growing globally along with the economy. In that respect, it's a good long-term investment. It won't shoot up like a rocket. They have some issues they're working through. But that's why you can get it at about 12 times earnings versus some other industrial stocks.
"And they have GE Capital, which has a lot of earnings power," Croft adds.
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* General Electric maintains a minority ownership of NBCUniversal, CNBC's parent company.
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