General Electric Refocuses in the Wake of Investor Dissapointment

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In May of 1896 the Wall Street Journal debuted its index of twelve smokestack stocks that was designed to track the broader stock market in the United States. It would become the Dow Jones Industrial Average. Among the companies included was American Cotton Oil, its ancestors today are part of Unilever; American Sugar, now a part of Domino Foods; American Tobacco, the Lucky Strike owner which eventually became Fortune Brands; Chicago Gas, living on as part of Integrys Energy; Distilling and Cattle Feeding, part of Diageo now; National Lead, it’s largest paint brand – Dutch Boy – was sold to Sherwin Williams in 1980 and a stub of a lead smelter still exists in Texas; Tennessee Coal and Iron, acquired by U.S. Steel in 1907; U.S. Leather, which was liquidated in 1911; U.S. Rubber, part of Michelin today.

Only two companies are still around under the names used at the time. One of them is Laclede Gas, which is the largest natural gas distributor in Missouri. The other is General Electric, still a part of the now thirty member Dow Jones Industrial Average and a symbol of American industry and ingenuity. It traces itself back to two legends of American history: Thomas Edison and J.P. Morgan. It has also had to reinvent itself numerous times to stay relevant: no longer is its business about light bulbs or appliances. But, if General Electric cannot pull off a reinvention once again its future will lay in doubt and investors are taking notice.

John Flannery, the current leader of the company, took over on August 1st as only the thirteenth man to lead General Electric in its 125-year history. There has not been much time for a honeymoon. The stock is down about 24% since Flannery took over and 37% over the past year.

After declining following earnings for several quarters in a row, the company announced on October 6th that several key executives, including the Chief Financial Officer, would be leaving the company. Then on October 20th, General Electric’s earnings were far worse than what analysts had anticipated, even prompting the company and analysts to discuss a dividend cut. Investors complained of not only poor performance, but also an opaque and complicated system of accounting that made it extremely difficult to sort out the financial statements. Reported revenues were 14% higher than the previous year, but only because of acquisitions. Net income declined by 13%.

For many years General Electric relied upon the strategy of being the first or second in market share in each of its business segments and developing world-class managers who could run them, regardless of their background. Bob Wright, for example, was an industrial leader who ran the NBC television network. The company has seven divisions today, excluding the scaled back GE Captial which is now solely providing financing support for the industrial units.

After performing a strategic review, Flannery announced this morning in a conference call that in the future General Electric will focus on just three industrial divisions: Power, Aviation, and Health Care. The power business supplies electric utilities in the form of transmission equipment, turbines, and power plants. Aviation has a key position in the market for jet engines, and health care manufactures diagnostic equipment, and ultrasound and MRI machines. Gone from the portfolio will be the oil and gas, transportation, and lighting divisions.

Flannery commented on this morning’s call:

We have not performed well for our owners. Going forward, we will create the most value from the portfolio of our businesses. We will be a digital industrial company, much more transparent and a company that matters to the world.

The company also announced it was cutting its dividend in half – $.96 per share to $.48 and lowered current year guidance to between $1.00 and $1.07 per share.

Shares are down nearly 8% in afternoon trading at $18.86.

 

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