GE’s ‘Quarterback’ Has Great Field Vision

Bargain shares, healthy yield could sweeten post-crisis comeback

GE’s ‘Quarterback’ Has Great Field Vision

dowleadersig GEs Quarterback Has Great Field VisionAs a former right tackle for the Dartmouth football team, General Electric (NYSE:GE) CEO Jeff Immelt knows what it means to be on third down and long with the game on the line — and the difference between playing to win and playing not to lose.

Although the company’s share price was sacked during the financial crisis and Great Recession, Immelt is counting on a big comeback for GE in 2012, driven by a new focus on “insourcing” and strong growth in emerging markets.

It has been more than a decade since Immelt beat out rivals Jim McNerney and Alan Mulally for the right to succeed the iconic and mercurial Jack Welch, who earned the nickname “Neutron Jack” for his ability to eliminate 100,000 employees while leaving buildings standing. Today, those rivals lead powerhouse teams of their own: Mulally wrote the playbook for Ford’s (NYSE:F) drive back to profitability and McNerney is soaring through turbulence at Boeing (NYSE:BA).

Immelt’s tenure at the helm of the global diversified giant has been mixed. Since Welch’s handpicked successor took over in 2001, GE stock has slipped 36% — the Dow rose 30% during that same time frame. During Welch’s 20-year reign, GE shares vaulted nearly 3,100% and the company’s growth rate approached 20%. That’s a pretty tough act for anyone to follow — even an insider whose first job after earning his Harvard MBA in 1982 was as an internal consultant for GE.

To be fair, Immelt has had some tough breaks. He stepped into the CEO job just days before 9/11, a tragedy that hammered several of the company’s core businesses (most notably aviation). The Enron scandal followed three months later.

“This was not a great year to be a rookie CEO,” Immelt wrote in his 2002 letter to shareholders.

Tougher years would follow. GE, which had sunk more than $85 billion into hundreds of real estate, sub-prime lending and finance deals, saw those markets collapse. The global recession and financial crisis mugged GE Capital, sending the company’s stock down 56% in 2008. By March 2009, GE stock slipped below $7 a share — its lowest price in 15 years — and the company cut its dividend for the first time since 1938.

“Let’s face it: our company’s reputation was tarnished because we weren’t the ‘safe and desirable’ growth company that is our aspiration,” Immelt said in his 2008 letter to shareholders. “I accept responsibility for this. But I think this environment presents an opportunity of a lifetime. We get the chance to reset the core of GE and focus on what we do best.”

Focusing on what GE does best has dominated Immelt’s agenda during the past couple years. Key moves include selling controlling interest of NBC Universal to joint venture partner Comcast (NASDAQ:CMCSA) 14 months ago for $6.5 billion in cash. It also sold off all $2 billion of GE Capital’s Mexican mortgage assets to Spain’s Grupo Santander. The company invested heavily in the oil and gas services sector with acquisitions of Dresser Industries, British Wellstream Holding and John Wood Group.

Immelt has prioritized improving GE’s manufacturing operations — particularly the company’s energy, transportation and research & development units — a task that spans leading-edge technologies in medical and alternative energy niches, such as wind and solar. He also recognizes the vital importance of global markets: 60% of the company’s revenue is now generated outside the U.S.

And just in case Immelt had too much time on his hands after those multiple full-time jobs, President Barack Obama last fall tapped the Republican to be his “jobs czar,” tasked with finding ways to motivate corporations to create more jobs in the U.S. And Immelt’s answer for GE just might be the answer for corporate America as a whole.

In the March issue of the Harvard Business Review, Immelt writes that while labor costs led many U.S. companies to outsource manufacturing, a new “broader set of metrics” has led GE to reverse course and invest in U.S. manufacturing operations.

“At a time when speed to market is everything, separating design and development from manufacturing didn’t make sense,” he writes. “Around 2008, we came to the conclusion that outsourcing was quickly becoming mostly outdated as a business model …”

Immelt is a firm believer in the mantra that innovation is essential to gaining a competitive edge. And innovation has three key elements:

  1. Building in-house innovation capability by hiring new employees with advanced skill sets.
  2. Employing lean manufacturing practices by enabling collaboration among designers, engineers, and assembly-line workers.
  3. Crafting a new labor relations model that works hard to find common ground with unions.

But Immelt also has an eagle eye on the opportunities for GE outside the U.S., particularly in emerging markets. GE expects sales will rise 20% to 25% this year in countries with abundant natural resources like Australia and New Zealand. Infrastructure spending in the African nations of Southern Sudan, Libya and Ethiopia alone is expected to reach a combined $140 billion by 2015, according to an investors’ presentation in Rio de Janeiro that GE leaders made Wednesday. The company is setting its sights on those opportunities.

The stock is starting to rebound, too, but at around $18.75, it’s still a bargain. With a market cap of nearly $200 billion, GE has a price-to-earnings growth ratio of 0.9, indicating the stock is slightly undervalued. It has a current dividend yield of 3.4% and is trading 34% above its 52-week low last December.

Bottom Line

Immelt plans to earn his pay this year, as GE seeks to boost its innovation and manufacturing edge through insourcing and a growing commitment to emerging markets. And if the competitive fire kindled by throwing blocks for Big Green’s quarterback isn’t enough to help him lead GE into a brighter tomorrow, memories of mentor and predecessor Jack Welch standing nearby with a blowtorch likely is.

Immelt tells a story of moving from GE Appliances to GE Plastics in 1992, where he succeeded in convincing automakers that they needed to use more plastic parts. Unfortunately, he misjudged the impact of inflation and didn’t raise prices on those parts fast enough — triggering a $50 million earnings miss in 1994.

“Neutron Jack” ran Immelt to ground at a company function and reassured him that he still believed in him, even after such a big mistake.

“You’re going to get this right,” Welch said in his inimitable way. “If you don’t, you’re going to have to go.”

That’s just as true for Immelt now as it was then. All things considered, Immelt has a good grasp of where GE is in the game, where it needs to go and what it needs to do to get there. The stock is a good buy now, although it could possibly flutter as low as $17.50 before its next earnings report April 20.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, http://investorplace.com/2012/03/general-electric-ge-ceo-jeff-immelt-field-vision/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.