General Electric Company: The Fall of the Myth of Immelt

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General Electric - General Electric Company: The Fall of the Myth of Immelt

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Since John Flannery became CEO of General Electric Co. (NYSE:GE) in June, the shares have lost nearly one-third of their value.

The company missed badly on earnings for the September quarter. Flannery has signaled a major shake-up to be detailed November 13.

Cash flow cratered as predecessor Jeff Immelt remade GE into an energy company, under the guise of industrial technology leadership. The 24-cents-per-share dividend, which now yields almost 5% but costs over $2 billion each quarter to maintain, is now threatened. 

Some analysts doubt the company, which has been part of the Dow Jones Industrial Average since it began in 1896, can survive in its present form.

But Immelt still has his supporters, spouting some dangerous spin about his fall and corporate democracy.

GE vs. Under Armour

Steve Blank of the Harvard Business Review recently blamed Immelt’s fall on “activist investors,” Ed Garden, chief investment officer of activist hedge fund Trian Partners, was recently added to the GE board. 

To this, a former GE stockholder can only say, “Thank God.”

Blank calls Trian a “corporate raider” interested only in short-term profit at the expense of investment. But what Flannery has found is that Immelt’s claims of progress were just that — claims. Even Blank admits to “poor execution in its traditional businesses.” Execution is the CEO’s job.

While GE stock may be headed for the teens as it sells over $20 billion in assets to pay down $136 billion in debt, it can be saved.

The same is not true for Under Armour Inc. (NYSE:UAA). That’s because founder Kevin Plank engineered a 2016 “stock split” creating a new class of shares, one designed to maintain his hold on the company.

As with Alphabet Inc. (NASDAQ:GOOGL) and Twenty-First Century Fox Inc. (NASDAQ:FOXA), Plank has broken with corporate democracy. No activist can buy up Under Armour shares and threaten him, because his “Class C” shares control the company.

The result is that Under Armour has lost more than half its market cap in 2017. It’s now worth 40% less than Lululemon Athletica Inc. (NASDAQ:LULU), which I once suggested it buy.

I personally find the management at Google and Fox to also be overly passive and self-satisfied, insulated from critics, and the stocks to be bad investments. Shareholders are lucky Facebook Inc. (NASDAQ:FB) finally decided not to go down that road. 

Can GE Be Saved?

I don’t know whether GE can be saved. I think it can be, in some form. JP Morgan & Co. Inc. analyst Stephen Tusa, who has been right about the company all the way down, has his doubts.  GE has huge pension and insurance obligations; its oil, gas and engine businesses are going through an extended period of weakness; and the winners, like jet engines, are at their maximum profit levels.

Until investors have full visibility into the depths of GE’s problems and a realistic plan from Flannery to escape from them, I agree with our Portfolio Grader that the stock is a strong sell. 

But the fall of the House of Immelt also illustrates another problem. The cult of the “heroic” CEO is as pervasive, and as dangerous, as Silicon Valley’s “cult of the founder,” which Blank of HBR attacked in a recent cover story. 

What investors need, what they should demand, is visibility into the truth behind the numbers on companies they buy, honesty from the people running them, and the opportunity to turn the ship around before it runs aground.

Anyone who just says, “trust me” is not to be trusted with your money.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time,  available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/general-electric-co-ge-fall-of-the-myth-of-immelt/.

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