Acclaimed investors Warren Buffett and Bill Miller own 10 of the same stocks. One of those holdings is General Electric (NYSE:GE), which, unfortunately for them, is down 8% year-to-date as of October 12. GE has underperformed the S&P 500 for the past 15 years and it will continue to do so. Buffett should sell the unwieldy conglomerate, which represents less than 1% of Berkshire Hathaway’s (NYSE:BRK.A) stock portfolio, and buy agricultural machinery maker Deere & Co. (NYSE:DE). Here’s why.
No Longer Manufacturing
Going over GE’s second-quarter report, I’m struck by how little manufacturing it does these days. The No. 1 segment in Q2 in terms of revenue and profits was GE Capital. With revenues of $11.6 billion, or 34% overall, and operating profits of $1.7 billion, or 32% overall, it’s clear that a big part of this business has little to do with manufacturing. At least CEO Jeff Immelt had the good sense to jettison NBC Universal, which had absolutely nothing to do with making refrigerators or jet engines.
Upon closer inspection, you’ll also notice that much of GE’s manufacturing prowess no longer comes from within. Long gone are the days where employees emulated the company’s brilliant founder, Thomas Edison. In the first half of 2011, GE made $7.8 billion in acquisitions, including its $3.2 billion purchase of Texas-based Dresser Inc., a manufacturer of relief valves and other infrastructure technologies. Today, it’s a company of M&A specialists, accountants and bankers, with a few engineers thrown in for good measure. Its manufacturing soul has long since been ripped away.
Fire the Job Czar
President Barack Obama recently appointed Jeff Immelt as his jobs czar. That’s amazing for two reasons: Immelt is a Republican and General Electric could never be confused with jobs-creating small businesses. Immelt’s interview on the news program 60 Minutes, on Oct. 9, delivered some interesting insight into the company as well as the man who succeeded Jack Welch. Immelt suggested that America would have to create 300,000 jobs per month for an undetermined amount of time to get back to where it was prior to the recession. General Electric’s contribution to this effort is 15,000 new jobs, about half for manufacturing.
That’s a start, I suppose, but Immelt has to know that his company has cut far more jobs in America than it has created. Those who remember Jack Welch in his early days as GE’s CEO will recall he axed 100,000 jobs over four years, beginning in 1981, then repeated the process in 2001. Investors who believe in good corporate citizenship have to be laughing at this odd choice for boosting America’s employment situation. Immelt’s interview on 60 Minutes was nothing more than public relations.
Warren, General Electric’s best days are behind it.
Middle America
In that 60 Minutes interview, Immelt begged his Brazilian workers to get up every morning hating the color yellow — particularly the signature hue of competitor Caterpillar (NYSE:CAT). He can add another color to his hate list — Deere & Co.’s green. While not direct competitors, GE and Deere both represent a big part of America’s manufacturing past. GE dates back to 1890, when Edison brought several of his companies together. Deere goes back even further, to 1837, when a blacksmith by the name of John Deere established the business that still bears his name.
In terms of size, there’s no comparison. At $147.6 billion, General Electric’s revenues are almost five times larger than Deere’s, while GE’s enterprise value, at $555 billion, is 10 times larger. GE is the unwieldy heavyweight to Deere’s elusive welterweight.
With the world population continuing to grow, though, the demand for food will also. Deere’s opportunities for growth seem far better than GE’s. Its revenue in 2011 will jump 25%, with 10% growth from Canada and the U.S. and 49% from the rest of the world. By the end of this year, Deere likely will derive more than 50% of its revenues from countries other than Canada and the U.S. Its profits in 2011 will be $2.7 billion or $6.52 a share. At the Oct. 12 closing price of $71.05, it is trading at 10.9 times earnings compared to 11.9 for GE. I would characterize Deere’s stock as reasonably priced at present, if not somewhat cheap. Long-term, it has always outperformed GE’s stock.
Bottom Line
Warren Buffett has $127 million invested in GE. It’s been parked money for more than a decade and could remain so for a long time to come. I suggest Buffett wave the white flag and surrender to Deere. Berkshire Hathaway investors will be better off as a result.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
