The recent news that Nelson Peltz was putting pressure on General Electric Company (NYSE:GE) CEO Jeffrey Immelt after missed a number of key performance benchmarks put a charge in GE stock, rising to a one-month high on the possible (forced) retirement of its long-time chief executive.
However, opinions are divided on how exactly to get General Electric shares moving again.
Some believe it’s time for Immelt to step aside and retire — four years early. Others believe the CEO isn’t the problem, and that General Electric is simply too big a company operating in a number of low-growth industries that can’t grow earnings fast enough to generate higher multiples to move GE stock higher.
Who is right? Well, that’s the billion-dollar question.
What we do know is that Nelson Peltz paid approximately $25 a share over several months in 2015 for 90.6 million shares of GE stock — a stake the activist investor has since trimmed to 67.4 million shares.
Peltz has made 19% on his investment through March 16; the same investment in the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) would have made 15.9% from June 30, 2015, through March 16 — a period of time I’m using because Peltz’s original purchases were in the second quarter of the 2015 calendar year.
So, he hasn’t done badly, but now it’s put up or shut up time. GE stock is at an inflection point; Peltz must decide whether to carry on or retreat with profits in hand.
Should Immelt Get the Ax?
If JPMorgan Chase & Co. (NYSE:JPM) analyst Stephen Tusa was in charge of this decision — he’d sell.
“Facts are cash is weak, margins/share of customer wallet are already at entitlement, the sum of the parts valuation points to a low 20s stock price, not even considering tax and GE corporate accounting dis-synergies, with businesses that are too big to be take-outs,” Tusa recently remarked in Barron’s.
According to Tusa, there’s a very real possibility that Peltz could see all of his profits disappear in the not-too-distant future.
That’s where the idea of replacing Immelt comes in.
The markets don’t seem to be buying the GE turnaround story, but they do seem to like Peltz’s saber rattling.
So perhaps the best way for Peltz to extract a greater return on his investment is to make a big scene, oust Immelt and bring in someone who doesn’t have a 15-year record of mediocrity hanging over his head — GE stock has a 15-year annualized return of 0.4%, 660 basis points worse than the S&P 500. General Electric could use someone with previous experience re-igniting growth in a massive global enterprise.
Unfortunately for Peltz and GE’s millions of other shareholders, these are few and far between and very hard to come by.
Better Options Than GE Stock
A better idea might be for Peltz to cash in his chips and reinvest the money in another industrial stock, one that’s got a much better record of delivering shareholder value in recent years.
In December, I suggested that investors consider 3M Co (NYSE:MMM) stock instead of GE because the maker of Scotch Tape and Post-it Notes has higher margins and better growth. Most importantly, 3M’s enterprise value is 14.1 times EBITDA — one-third GEs 22.5 multiple. MMM is better and it’s cheaper. It seems like a no-brainer.
Oh, and Nelson, if you need any other stock ideas, in February, I suggested Boeing Co (NYSE:BA) was also a better alternative to GE.
But you’re probably not going to listen to me for two reasons: First, you’re a billionaire and I’m not even a millionaire; and secondly, and probably more to the heart of the matter, you’re an activist investor and stir the pot is what you do. You can’t help yourself.
Well, Bill Ackman could swallow his pride, and you should too. GE in my books is a big sell.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
