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General Electric (NYSE: USS)
General Electric, 3135 Easton Turnpike. Fairfield 06431
(203-373-2211)
Chairman and CEO: John F. Welch Jr.
Market capitalization: $226 billion
Revenues (3rd quarter 1997): $21.99 billion Earnings ( $2.01 billion
Employees: 239,000, US, 155,000
Dividend: $1.04. Yield: 1.5%
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Business New Haven
11/3/1997
By: BNH
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General Electric confounds the conventional wisdom that the stock market loves focused firms. It also defies the managerial precept that companies should stick to core competencies.
In addition to its well-known brand name in appliances and lighting, GE also has significant divisions in power systems and electrical distribution and control. It sells aircraft engines and plastics, while owning NBC, America's top-rated television network. Its financial subsidiary, GE Capital, provides financial services internationally.
The market has rewarded GE with premium valuations, pricing the stock recently at nearly 30 times trailing earnings and over seven times book value. . As of late October, GE's stock price had climbed 37 percent after turning in jumps of 41.18 percent in 1995 and 37.33 percent in 1996. Its three-year annual return (including dividends) for GE shareholders was 44.76 percent, and its five-year performance almost as impressive: a 31.6 percent return.
This comes both from the charismatic leadership of Jack Welch, who gives the sprawling conglomerate an identity it would otherwise lack, and from top-quality management. Good management is reflected in both GE's 25 percent return on equity and its consistent growth in both sales and profits. Over the last three years, revenues have grown at an annual rate of 12.4 percent while profits have grown 19.0 percent yearly.
NBC might be the most visible piece of the GE empire. In addition to the network itself, NBC owns and operates 11 local stations. Despite this, broadcasting accounts for only a fraction of GE's sales and profits. In 1996, for example, broadcasting brought in $5.2 billion in revenues while generating $953 million in profits, while the company had total revenues of $79.2 billion and consolidated operating profit of $12.3 billion.
Broadcasting revenues are growing quickly, however, jumping 17 percent in 1995 and 34 percent in 1996, in part thanks to a boost from the summer Olympic Games.
GE's industrial side is both less glamorous than television - and growing less rapidly. Sales in GE's aircraft engines division, for example, rose only three percent in 1996, and appliance sales by seven percent. Productivity gains offset lower sales prices to make these divisions' earnings performance slightly better than sales: 1996 operating profits grew by four and eight percent, respectively. GE's industrial products and materials divisions showed a similar pattern: flat or limited sales growth and commensurate profit growth.
The largest share of GE's sales - and the lion's share of its performance - comes from its GE Capital Services Division. This group concentrates on financing (including credit cards and auto loans), consumer insurance and reinsurance.
This is the real engine of GE's shareholder performance. Capital Services made up $32.7 billion of GE's $79 billion 1996 revenues, making for sales growth of 23 percent over 1995.
The question for investors and GE management is whether the company can sustain its earnings growth and thereby keep its stock price at a premium to the market. With its industrial divisions turning in respectable performance, but not enough to sustain an above average P/E ratio near 30, GE will have to rely on broadcasting and finance to maintain its impressive performance.
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