Over the years, shareholders have been flocking to GE as a safe haven. As a diversified conglomerate it makes sense -- but what happens when you overload a lifeboat? Over the past decade, in an uncertain market that continues to creep up the wall of worry, investors have continued to bid up the stock at a faster clip than the company's fundamentals have justified. Overcrowded sanctuary with support ready to buckle under. A bloated tortoise with unrealistic dreams of turbo. Sorry, tortoise rooters, this shell is about to pop.
Over the last five years the company's market cap has grown fivefold. Over the last three calendar years the stock has gained at least 41%. Guess how many times earnings growth has matched that mark?
If you'll pardon the expression, let me see if I can bring good things to life. In GE you have a company that has spent the last two decades flourishing under Jack Welch -- but his retirement no doubt looms next year when he turns 65. Like Coke <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> and its sluggish successorship to Robert Goizueta, I certainly wouldn't feel confident owning a company with such a complex and sophisticated collection of entities that only Welch has proven to harness effectively.
Besides, with or without Welch, the prospects going forward just don't justify today's lofty valuation. Probably the best way to prove GE's anemic ways is to break it up into its different components. Some are growing slowly. Some aren't growing at all. Quite a few of these parts will be heading in reverse.
Take NBC for instance, please. The peacock's feathers haven't been all that fluffy lately. Thanks to the popularity of reality-based shows like ABC's Who Wants to Be a Millionaire and CBS's Survivor -- and defections from NBC's own sitcom and drama ranks along with losing NFL broadcasting rights -- the network has gone from gold to bronze in recent ratings.
Like its now defunct Seinfeld series, the network has become a halfway house for nothingness. I'd suggest checking NBC into E.R. but I see that George Clooney has gone on to another sinking ship. In the meantime, MSNBC remains the poor viewer's CNN, and just how well-situated is CNBC to handle the programming needs and capture the waning audience interest in a bear market?
GE Capital Services, the company's financial arm, commands just over half of GE's total revenues. While it is a low-margin business relative to the rest of the company, it still contributed 38% of the bottom-line profits last quarter. While some aspects of GE Capital are interest-rate proof, one has to wonder how the consumer and corporate lending efforts will be hampered as we enter the reality of higher interest rates.
Well, we're seeing it already. Last week, new home sales fell for the third consecutive month to levels we haven't seen since 1997. It's a trickle down effect that will naturally have a major impact on GE's appliance division. But corporate spending is also set to take a breather as higher rates and growing labor costs temper leveraged ways. So where will GE's profits take off?
It won't be in aircraft. It's not that GE isn't a major player here. GE is the leading engine builder, and through its finance arm it buys planes and leases them out to the airlines. But how big is this potential market? According to aerospace research specialist Forecast International, the demand for regional and larger airplanes over the next decade will grow at rates of 7% and 5%, respectively.
That's some low-octane growth. Since GE pretty much owns the engine market already, it's not as if it can eat up market share from competitors like Rolls-Royce.
What's left? Plenty. The company's strongest subsidiary so far this year has been in the power sector where the cyclical spurt in demand of gas turbines has, umm, fueled some strong results. Again, this is a cyclical industrial segment where strength today almost invariably means weakness in the future.
From plastics to a medical equipment field that will remain susceptible to any kind of healthcare reform, GE is everywhere you might not want to be. With so many slow-growth pieces making up this puzzle, can the company maintain its elevated share price? With all due respect to founder Thomas Edison, show me the light at the end of this tunnel.
Sure, the company had a record quarter. But how comfortable can one be when a company is about to embark on a painful transition at the top and when it's failed at such simple tasks as online content -- botching the past by mismanaging GEnie, one of the earliest online service providers, and mishandling the present with NBCi <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NBCI)") else Response.Write("(Nasdaq: NBCI)") end if %> going in for yet another makeover as it has shed 90% of its value over the past year.
So, looking ahead at analyst estimates of 16% earnings growth next year for a company trading at three times that multiple and closing in on 30 times cash flow, can I borrow one of GE's MRI machines to see what's going on inside the heads of some of these investors? And, while we're at it, what elastic substance is GE cooking up to give analysts the notion that the company will pull off that 16% growth in the first place?
Let's give the power subsidiary some afterglow going into 2001. Is there any other division that will realistically grow at 16% or better? With interest rates rising? With industry trends indicating otherwise? With total debt levels that have doubled to just shy of $200 billion over the past five years? Yes, $200 billion. Five times the company's book value packed in short- and long-term debt. Scary stuff, ain't it?
Will the last misled seeker of a safe haven turn out the light on the way out -- before Welch does.
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