Monday, April 14, 2008

Too slow for GE earnings miss

Events of late have moved faster than ideas.

One example---On Monday the 7th the GE annual report arrived in the mail, always worth a look through. The CEO letter was long, really long for a CEO letter, eight small type text and graph pages and one page with a fine shot of four smiling execs. This letter was longer than any Jack Welch letter that I remember and had that here's how we manage style of presentation with charts that Welch made mandatory for any GE successor, which Immelt still is even after six years in charge. The "Operational Excellence" chart is the best example of this year's version of GE's self-congratulatory intellectual approach to their management style(having once been at a firm that imposed Welch's six sigma approach and required everyone to pretend that it was meaningful---I must admit to referring to it as six sigmoid---there is a bone to pick here). Anyway, the overall effect of this year's annual report was overkill, but the thought was there that "why would they go to all the trouble to write all of this peachy stuff if they weren't pretty confident". There was one problem, however, that I began to dwell on. Immelt began the letter with four paragraphs of high-falutin' talk about the difficult current economic environment, writing as if he were the head of the IMF, Bill Gross or Warren Buffett. It seemed out of place, as in more than a little bit of hubris, and his advice in the fifth paragraph was to deal with this environment by investing in GE, which he basically said was above it all.

This was something to write about in Eyes Not Sold, no doubt about it. Things were busy but there was no rush, so thinking this possible post through seemed to be in order and in fact necessary given events here. Then BOOM, Thursday afternoon April 10th GE reports a big negative earnings surprise. Deadline missed, but good idea. Last year's Wachovia annual report led to a perspective posted here nine months ago that has been proved absolutely right and is still going strong. There was time to write and wait. This year that's not so. See or intuit a weakness, it may come out in the wash in a few days. No waiting time in this environment.

GE's announcement was a true investor relations disaster. With over 40% of GE shares in individual investor's hands, it is also a public relations disaster. It's really not as bad as it looks but the credibility issue will stick with Immelt, and he may not recover.

The results were emblematic of what is going on in corporate America now. Many financial companies are going through a severe crisis period while many commericial and industrial companies are cash rich, well funded, and have strong capital bases. GE is a hybrid and that is not a reference to their intense focus on environmentally efficient technology. They have a large finance sector and it took significant write downs. This almost had to happen, and it is part of the painful but cathartic cleansing that is going on now in financial companies. It will pass, and apart from an appliance division that is being hurt more than expected by consumer pressures, GE's businesses are fine.

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