GE stock -- in which I am an investor -- will be removed from the Dow Jones Industrials Index next week -- a position it has occupied since 1907.
Is this the ultimate sell signal? In retrospect, that sell signal was the day Jack Welch&a;nbsp;announced that Jeff Immelt had won the competition to replace Welch&a;nbsp;as GE&s;s CEO.
But that is no help now.&a;nbsp; The delisting from the Dow&a;nbsp;is a powerful symbol of GE&s;s decline. However, it is not the end of its world -- after all, AT&a;amp;T was also removed from the Dow and seems to be&a;nbsp;surviving -- having just completed its acquisition of Time Warner.
But I plan to hold onto my GE shares.
Before getting into why, let&s;s take a look at Boston-based GE&s;s business and its financial performance. GE&a;nbsp; is a&a;nbsp;&q;diversified manufacturer&q; that operates&a;nbsp;eight separate businesses: power, oil and gas, renewable energy, lighting, aviation, healthcare, transportation, and specialty industrial financing (GE Capital).
In 2017 GE generated $120.5 billion in revenue, posted a net loss of $8.2 billion -- yet generated free cash flow of $2.5 billion (a figure which has been shrinking at a five year average rate of 31.1%, according to &l;a href=&q;https://www.morningstar.com/stocks/xnys/ge/quote.html&q; target=&q;_blank&q;&g;&l;em&g;Morningstar)&l;/em&g;&l;/a&g;.
In the first quarter, GE&s;s revenues rose 3,6% to $28.7 billion, its net income from continuing operations fell 46% to $440 million, and its EBITDA of $3.6 billion was up 14.1% from the year before, according to &l;a href=&q;https://financials.morningstar.com/income-statement/is.html?t=0P000002DO&a;amp;culture=en-US&a;amp;platform=sal&q; target=&q;_blank&q;&g;&l;em&g;Morningstar&l;/em&g;&l;/a&g;.
In the last year, its shares have lost 53% of their value.
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GE&s;s problems started when Jack Welch handed the reins to the wrong person. Jeff Immelt was&a;nbsp;not effective as CEO&a;nbsp;and is responsible for leaving GE in such a weakened condition that his departure was announced in &l;a href=&q;https://financials.morningstar.com/income-statement/is.html?t=0P000002DO&a;amp;culture=en-US&a;amp;platform=sal&q; target=&q;_blank&q;&g;June 2017&l;/a&g; --&a;nbsp;four years before his 20 years were up.
Back in 2007, I argued that Immelt was the wrong choice after GE&s;s stock price fell. What&s;s more it was clear that the better performing rival for the GE CEO, James McNerney, about whom I wrote, &l;a href=&q;https://www.amazon.com/You-Cant-Order-Change-Turnaround/dp/B0028N72CQ&q; target=&q;_blank&q;&g;&l;em&g;You Can&s;t Order Change&l;/em&g;&l;/a&g;, would have been a better pick.
In July 2007, I was summoned by GE&s;s then CFO, &l;a href=&q;https://www.businesswire.com/news/home/20160830005764/en/Keith-S.-Sherin-Retire-GE-35-Years&q; target=&q;_blank&q;&g;Keith Sherin&l;/a&g;,&a;nbsp;to Rockefeller Center and asked what I thought GE ought to do to get its stock price up. I gave GE its money&s;s worth -- I was not paid -- which was to tell Sherin that GE should exit businesses in which it was not a leader -- such as Media, Financial Services, Appliances, and Lighting.
That is still a work in process. And in February 2018, The &l;a href=&q;https://www.wsj.com/articles/how-jeffrey-immelts-success-theater-masked-the-rot-at-ge-1519231067/&q; target=&q;_blank&q;&g;&l;em&g;Wall Street Journal&l;/em&g;&l;/a&g; offered a look inside Immelt&s;s GE -- which it dubbed a &q;success theater&q; -- in which bad news was not discussed. As the Journal wrote In May 2017, Immelt
&l;/p&g;&l;blockquote&g;Defended his long-held 2018 profit goal, an optimistic benchmark Wall Street had long abandoned. &a;ldquo;&a;nbsp;not crap. It&a;rsquo;s pretty good really. Today, when I think about where the stock is compared to what the company is, it&a;rsquo;s a mismatch.&a;rdquo; It was a mismatch. On that day, GE shares were trading near $28. They would go on to collapse over the next six months while the stock market set fresh records.&l;/blockquote&g;
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In June 20 pre-market,&a;nbsp;they traded&a;nbsp;at a special low price of just&a;nbsp;$12.95!
GE will be replaced in the Dow by Walgreen&s;s. &l;a href=&q;https://www.cnbc.com/2018/06/19/walgreens-replacing-ge-on-the-dow.html&q; target=&q;_blank&q;&g;David Blitzer&l;/a&g;, chairman of the index committee at S&a;amp;P Dow Jones Indices, the company behind the Dow said, this move would make &a;ldquo;The DJIA more representative of the consumer and health care sectors of the U.S. economy. Today&a;rsquo;s change to the DJIA will make the index a better measure of the economy and the stock market.&a;rdquo;
GE does not strike me as overly upset with this. The company said in a &l;a href=&q;https://www.cnbc.com/2018/06/19/walgreens-replacing-ge-on-the-dow.html&q; target=&q;_blank&q;&g;statement&l;/a&g;: &q;We are focused on executing against the plan we&s;ve laid out to improve GE&s;s performance. Today&s;s announcement does nothing to change those commitments or our focus in creating a stronger, simpler GE.&q;
And the delisting should not affect investor behavior since a relatively small $29.5 billion of mutual and exchange-traded funds track the Dow Industrials -- 0.3% of the $9.9 trillion in assets linked to the S&a;amp;P 500 index through the end of 2017, according to data provided by &l;a href=&q;https://www.wsj.com/articles/walgreens-to-replace-ge-in-dow-industrials-1529443336?mod=hp_lead_pos5&q; target=&q;_blank&q;&g;S&a;amp;P Dow Jones Indices&l;/a&g;.
What&s;s more, delisting is not a death knell. In March 2015, Apple&a;nbsp;replaced AT&a;amp;T&a;nbsp; in the Dow but that did not stop Ma Bell from devouring Time Warner.
Since John Flannery &l;a href=&q;https://www.ge.com/reports/john-flannery-named-chairman-ceo-ge/&q; target=&q;_blank&q;&g;took over last August&l;/a&g; his demeanor suggests that GE is in an existential struggle to restructure its business lines and balance sheet in order to remain solvent.
Under Jack Welch, GE managed to grow its earnings at double digit rates and beat quarterly expectations by a penny -- which turned out to be &l;a href=&q;https://www.forbes.com/sites/petercohan/2012/10/10/jack-welch-pot-calling-kettle-black/#33a041e921e7&q;&g;done through some shady means&l;/a&g; -- yet it caused its stock price to soar to a record high in 2000 which valued the company at $594 billion.
I think investors would like to see GE return to that kind of consistent growth. And it is a long way from doing that.
So why not sell GE? Unless it comes to light that GE has major accounting problems or it can&s;t repay its debts, I think Flannery will find a way to follow the other advice I gave to Sherin in 2007 -- invest in businesses with the most profit potential in which GE is and will be a leader.
If that happens, GE will grow faster and its stock price will rise.
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