Friday, October 24, 2008

GE: Out Like A Light, Or Just On a Dimmer?

By Randy Alsman, Vice President, Portfolio Manager Questions about General Electric’s future are flying among investors lately. The stock has recently set a series of new 52-week lows. Criticism of CEO Jeff Immelt abounds, including left-handed compliments from legendary former GE CEO Jack Welch. GE Capital, a $65+ billion finance subsidiary, one so far without the same access to the full range of federal support available to banks, generates much concern. Its huge commercial property division is struggling with the decline in that market. The housing slump has hurt GE’s appliance division – now up for sale along with the storied lighting division. Even good news is sometimes seen as bad. Investing “genius” Warren Buffet recently professed his confidence in GE and bought $3 Billion of new preferred GE stock to prove it, but GE had to pay him 10% and the warrants that he got are now underwater. Despite its litany of problems, GE’s credit is still rated AAA. Only five other companies occupy that lofty perch. So, in many ways, GE is seen as embodying America’s economic preeminence in the world. However, there is enough fear in the air and blood in the water right now for the darkest of predictions to seem inevitable. Is General Electric destined to become another General Motors? Or at least, is GE going to deteriorate into one of those once-great companies that loses its way and can no longer put together a string of growing annual revenues and earnings? Maybe so. No one can see the future perfectly. But like a smoke screen, the current bad news hides some very solid, very positive things about GE. Most divisions of the company, except GE Capital, have been growing rapidly, and not just in the U.S. Heavily entrenched in the global conventional and alternative energy infrastructure markets, GE will continue to benefit from the world’s insatiable appetite for energy. GE is a world leader in sophisticated turbines for power generation and aircraft. It supplies locomotives to the energy-efficient rail industry. Aging Baby Boomers in the US and around the world will demand more MRI’s, CAT scans, cardiac imaging tests, and other diagnostic measures - markets that GE dominates around the world with only a few other firms. The entertainment business is viewed by many as recession-resistant, and again GE is a major player. The cash flow from NBC Universal continues to be very strong. The current double-whammy of a credit crisis and economic recession has hampered or damaged each of GE’s businesses. An objective eye will see, however, that none of those problems will last forever. Also, GE still is seen with good reason as a company just packed full of extremely competent workers, managers, and executives. Jeff Immelt does not make every decision that determines the future of GE. He has lots of very talented help. Finally, GE does a better job than possibly any other company of linking one division to another, enveloping large customers in the full range of GE’s product offerings. Things are rough and troubled right now. However, unless you think all hope is lost and we’re reverting to candles, voodoo medicine, horse-drawn wagons, and a barter economy, GE should continue to be an increasingly valuable company for many years to come. With today’s PE of 8.0 and a dividend yield of over 6%, one is buying GE on the cheap and is getting paid to wait out the economic turnaround that will inevitably come. GE is poised to provide handsome returns for investors with the courage and patience to ride out the latest storm. We own GE in a number of our investment styles. Our principals also own the stock. Please do not make investment decisions on the basis of this information. Consult your own investment professional for investing advice. Find out more about Randy Alsman and our other portfolio managers at the following link: http://www.donaldsoncapitalmanagement.com/right-template03.php?nav_ID=58&nav_Parent=45/