Monday, May 28, 2007
GE's Long Dormant Stock Price
Like the bulk of stocks, GE lost about half its value when the stock bubble popped in 2000. It has recovered about 28% since then but has basically been flat for the past five years, and many holders have either no gain or a losing position in the stock depending on their entry point. GE holders have endured years of frustration, but the fact is that during the bubble, GE traded at a ludicrous 5 or 6 times book, owing to the perception that they had the best CEO, Jack Welch, and were the best managed company in the US, and possibly the world. Back then, Jack talked about GE's valuation as if it were merely deserved, calling it "the premium for being GE." (Full disclosure - I was employed by a GE subsidiary).
GE built its great management reputation in the sixties and seventies, refining the conglomerate organization to an art form, built around the concept of the Strategic Business Unit. This enabled it to exploit its management depth, allowing its business leaders to hone their skills in relatively independent business units, but under rigorous corporate discipline and a very well defined management toolkit. Jack's insight that GE should focus its resources and capital on the businesses where it had a leadership position (either #1 or#2) was the finishing touch to GE's successful multi-business strategy. It added efficient use of capital and strategic focus to an already solid foundation.
In the 1990's, Jack discovered the Quality regimen Six Sigma. He was so impressed by the improvements and new products/processes achieved by Master Black Belts and their teams in GE's industrial business, that he decreed that Six Sigma should be imported to all of GE's businesses, including the Finance and Services businesses that by then, were providing most of the Company's profits. Though these businesses could learn some things from the Quality gurus, much of the Six Sigma discipline proved to be irrelevant to those businesses, if not downright dysfunctional. The Six Sigma goal of reducing error rates in industrial functions led to some very silly goals and statistical measurement projects when translated to the service businesses. Project teams trying to identify defect opportunities in service businesses became hilarious exercises in trying to squeeze square pegs into round holes. Worse, the GE Quality Bureaucracy decreed that all projects would follow one or the other of the two Six Sigma project methodologies. Gone was the systems development methodology, and any semblance of strategic marketing and product development. Instead, marketing and sales staffs were forced to work through the endless brainstorming and voting procedures in the Six Sigma Multi Generational Product Plan. Never mind that people experienced in the business knew that at least 80% of the ideas thrown up on the board were useless blind alleys. No criticism in brainstorming sessions was allowed. "Go slow to go fast" is what Black Belts reminded marketing leaders as they made their frustrations and impatience obvious. Then it's voting time, with folks who knew nothing about the business or its marketing realities getting an equal vote with experienced marketing leaders. The votes determined the black box result. Want to have a real no-holds barred debate about competitor strategy? Forget it. The Master Black Belts were well trained to avoid any semblance of conflict and debate in favor of facilitation.
GE had always believed in rotating young managers, feeling that a good manager could lead any business. They were quick studies in terms of getting up to speed in individual businesses. Translating this model to the finance areas might have been OK except that these managers were also graded on their ability to promote Six Sigma techniques. GE, always a little weaker on the marketing and sales side, became even worse as business leaders were recruited from the Master Black Belt ranks, (joining the financial types), whose career path typically went from Quality to Operations to Leader. Pretty soon, the best marketing and sales people were easily recruited elsewhere since they had no real chance to advance in the financially and operationally driven GE. The result was that Marketing and Sales became even weaker, and GE's management leaders, now dominated by 30 and 40 something general managers with no meaningful experience in customer issues, were now another weak link.
I don't think Jack ever realized that this was happening to his company, since the malaise hadn't yet set in on his watch. Poor Jeff Immelt has had to endure it and its effects, though he has moved as quickly as possible to return the Company to its industrial roots in some very interesting new areas, though its akin to turning an aircraft carrier.. That will be a better fit for GE's current culture. In the meantime, the stock's price to book ratio has retreated to a more realistic three times, still overvalued but only about a third as badly as in 2000. We are getting closer to where GE will be a good value again but GE holders may yet have to show quite a bit of patience before this stock makes any kind of big move. When you see GE at 2-2.5 times book, that is probably when it's compelling to buy. At the moment, the stock is acting better, so I could understand taking a position (and I still have a position, though I sold some shares quite a while ago). There's just no urgency to get in, in my opinion.
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On 5/23, I sold 200 CNRD out of the taxable account at 12.85, originally purchased on 11/2/04 for 1.95. Who doesn't love those six timers? I know I have sold a lot of these shares at lower prices, but there is no way I am kicking myself over this. Could I picture holding all those shares until now trying to call a top? Have we reached the top yet? No and maybe, so I'm not changing my formula.
GE built its great management reputation in the sixties and seventies, refining the conglomerate organization to an art form, built around the concept of the Strategic Business Unit. This enabled it to exploit its management depth, allowing its business leaders to hone their skills in relatively independent business units, but under rigorous corporate discipline and a very well defined management toolkit. Jack's insight that GE should focus its resources and capital on the businesses where it had a leadership position (either #1 or#2) was the finishing touch to GE's successful multi-business strategy. It added efficient use of capital and strategic focus to an already solid foundation.
In the 1990's, Jack discovered the Quality regimen Six Sigma. He was so impressed by the improvements and new products/processes achieved by Master Black Belts and their teams in GE's industrial business, that he decreed that Six Sigma should be imported to all of GE's businesses, including the Finance and Services businesses that by then, were providing most of the Company's profits. Though these businesses could learn some things from the Quality gurus, much of the Six Sigma discipline proved to be irrelevant to those businesses, if not downright dysfunctional. The Six Sigma goal of reducing error rates in industrial functions led to some very silly goals and statistical measurement projects when translated to the service businesses. Project teams trying to identify defect opportunities in service businesses became hilarious exercises in trying to squeeze square pegs into round holes. Worse, the GE Quality Bureaucracy decreed that all projects would follow one or the other of the two Six Sigma project methodologies. Gone was the systems development methodology, and any semblance of strategic marketing and product development. Instead, marketing and sales staffs were forced to work through the endless brainstorming and voting procedures in the Six Sigma Multi Generational Product Plan. Never mind that people experienced in the business knew that at least 80% of the ideas thrown up on the board were useless blind alleys. No criticism in brainstorming sessions was allowed. "Go slow to go fast" is what Black Belts reminded marketing leaders as they made their frustrations and impatience obvious. Then it's voting time, with folks who knew nothing about the business or its marketing realities getting an equal vote with experienced marketing leaders. The votes determined the black box result. Want to have a real no-holds barred debate about competitor strategy? Forget it. The Master Black Belts were well trained to avoid any semblance of conflict and debate in favor of facilitation.
GE had always believed in rotating young managers, feeling that a good manager could lead any business. They were quick studies in terms of getting up to speed in individual businesses. Translating this model to the finance areas might have been OK except that these managers were also graded on their ability to promote Six Sigma techniques. GE, always a little weaker on the marketing and sales side, became even worse as business leaders were recruited from the Master Black Belt ranks, (joining the financial types), whose career path typically went from Quality to Operations to Leader. Pretty soon, the best marketing and sales people were easily recruited elsewhere since they had no real chance to advance in the financially and operationally driven GE. The result was that Marketing and Sales became even weaker, and GE's management leaders, now dominated by 30 and 40 something general managers with no meaningful experience in customer issues, were now another weak link.
I don't think Jack ever realized that this was happening to his company, since the malaise hadn't yet set in on his watch. Poor Jeff Immelt has had to endure it and its effects, though he has moved as quickly as possible to return the Company to its industrial roots in some very interesting new areas, though its akin to turning an aircraft carrier.. That will be a better fit for GE's current culture. In the meantime, the stock's price to book ratio has retreated to a more realistic three times, still overvalued but only about a third as badly as in 2000. We are getting closer to where GE will be a good value again but GE holders may yet have to show quite a bit of patience before this stock makes any kind of big move. When you see GE at 2-2.5 times book, that is probably when it's compelling to buy. At the moment, the stock is acting better, so I could understand taking a position (and I still have a position, though I sold some shares quite a while ago). There's just no urgency to get in, in my opinion.
--------------------------------------------------------------------------------------------
On 5/23, I sold 200 CNRD out of the taxable account at 12.85, originally purchased on 11/2/04 for 1.95. Who doesn't love those six timers? I know I have sold a lot of these shares at lower prices, but there is no way I am kicking myself over this. Could I picture holding all those shares until now trying to call a top? Have we reached the top yet? No and maybe, so I'm not changing my formula.
