Jeffrey Immelt took the helm of General Electric Company (NYSE:GE) just days before Sept. 11, 2001, a date which will live in infamy.
Talk about going from the frying pan into the fire.
Not only did Immelt have to deal with GE’s business post-9/11, but he was taking over a company that was in drastic need of a makeover.
“When I joined the company in 1982, 80 percent of our revenue came from the U.S. Now, 70 percent of our revenue will be global,” Immelt said in May 2016 speech to graduates of NYU’s Stern Business School. “We have customers in more than 180 countries. We export over $20 billion worth of goods to the world each year. We have become woven into the global economy.”
It sure has. In many respects, it’s one of the finest companies in the U.S. — or the world for that matter.
According to Fortune, it is the 10th most admired company on the magazine’s annual list of Most Admired Companies. Heck, when you’ve got someone as brilliant as Thomas Edison as company co-founder, you’re bound to have big aspirations.
Immelt has been on quite a ride since 2001.
By no means do I think the man should be fired, but when you consider that General Electric stock has achieved a total return of under 30% since his first day on the job through Dec. 12, you have to question why anyone would remain a shareholder.
Clearly, Immelt has been unable to deliver for investors.
According to a 2014 study by Equilar, the average CEO of an S&P 500 company was on the job for 7.4 years, up from 6.6 years a decade earlier; Immelt has been on the job 15 years, or double the average. You’d think GE stock would also have doubled, but no such luck.
Yes, there have been flashes of brilliance from General Electric stock over the past decade, including four years (2010, 2012, 2013, and 2015) with annual total returns in excess of 20%, a big reason why its five-year annualized total return is 17%, 176 basis points higher than the S&P 500.
Although returns have been better in recent times, GE stock hit a 10-year high of $42.09 on Oct. 1, 2007. It’s still working on eclipsing that almost a decade later.
Earnings drive stock prices.
In 2007, General Electric had operating profits of $51.3 billion on $172.5 billion in revenue, a 29.7% operating margin. The closest it’s come to matching this margin was in 2011 when it made 24 cents operating profit out of every dollar of revenue. Today, it’s almost less than half that amount.
According to Finviz.com, there are 452 companies in the S&P 500 with positive operating margins, 244 of which are greater than 15%. Further, there are 42 companies operating in GE’s sector, with 14 greater than 15%.
Care to guess which of the 14 companies most resembles GE’s business? That would probably be either 3M Co (NYSE:MMM) or Danaher Corporation (NYSE:DHR). However, because Danaher spun-off its industrial businesses in July, comparing 3M’s stock to GE’s makes the most sense.
Over the past five years, some of the best performance in Immelt’s 15-year tenure, GE stock has underperformed 3M by 255 basis points. Since September 6, 2001, the day before Immelt took the top job, 3M’s stock’s appreciated by 400% or 17 times more than GE stock.
If you take a look at 3M’s operating margins you’ll see that they’ve been rangebound over the last decade between 20%-25%. Sometimes higher, sometimes lower, but generally consistent and always in the 20’s. You can’t ask for more than that from a company.
GE might be a good company but it’s a terrible stock.
If it goes up 15% a year for the next five years, you can be sure MMM will go up 25% over the same period. 3M is a good stock; GE, not so much.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.