Jeff Immelt Jeff Immelt: Green Is Green
by Justice Litle
The Rude Awakening
Wall Street, New York
Wednesday, March 22, 2006 Justice Litle discusses GE and whether its new CEO, Jeff Immelt, will continue the company's tradition of rebuilding from the ground up. ------------------------- - Less CEOs last century than the Vatican has had Popes
– the changing face of an industrial giant,
- Good clean tips for a good green portfolio,
- A few new currencies latch on to the market data and
much more...
------------------------- Justice Litle, reporting from the pristine shores of Lake
Tahoe, Michael Steinhardt, one of the great money managers of the
past few decades, contributes much of his success to a
concept known as "Variant Perception." Simply put, variant
perception involves developing a viewpoint at odds with the
general consensus – and then investing on that viewpoint in
expectation that the crowd come around. Steinhardt's concept works because so much of what succeeds
– or fails – on Wall Street results from opinion and
perception. Determining the proper valuation of a stock is
not a simple thing. It has been said that a stock's
valuation is less like a cut-and-dry mathematical formula,
as academics would have us believe, and more like a rubber
band attached to a peg. The more external factors involved
in sussing out a company's prospects, the more flexible the
rubber band becomes, allowing investors to wildly overshoot
or undershoot. Nor is the peg itself in a fixed position.
Changes in the economy, in capital flows, in technology and
consumer trends, in business models and management
decisions — all have a cumulative effect. Some changes are cyclical, guiding the peg up, down and
back up again in a series of repeated movements over time.
Other changes are structural, permanently adjusting the peg
to a higher or lower plateau. Investors are historically
much better at dealing with cyclical change, because it is
based on the past. Structural change is much harder for
investors to get right, because it involves things like
detective work, intuitive connections and creative thinking
(not to mention a willingness to break with the past). My most recent recommendation to the readers of Outstanding
Investments is a classic case of variant perception and
structural change at work. The recommendation is General
Electric, one of the oldest and most admired companies in
the world, with a market cap to rival Exxon Mobil's.
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------------------------- "Green is Green"
By Justice Litle ExxonMobil is America's largest conventional energy
company. But General Electric is fast becoming America's
largest non-conventional energy company. Strange as it may
seem, these two corporate giants (GE: NYSE and XOM: NYSE)
are on opposite sides of the same coin. As super-major oil
companies like Exxon struggle to replace their oil reserves
at a reasonable cost, the demand for alternative energy and
clean technology will only grow stronger. Furthermore, due
to the growing anxiety about global air quality, clean
energy sources seem certain to steal market share from
fossil fuels. GE is positioning itself to take full advantage of this
shift. General Electric CEO Jeffrey Immelt is moving the
company out of the financial engineering business and
embracing the environmental technology business. Immelt's
new catchphrase, "Green is green," captures the spirit of
GE's aggressive push into clean technology, alternative
energy and eco-friendly infrastructure. The all-encompassing tag line for GE's new strategy is
"ecomagination," but the green reference (as in the color
of money) is perhaps more descriptive. This is not just
about doing well by doing good; the shift is rooted in
hard-nosed business sense. There is money to be made in the
environmental space: Getting out in front means leaving
rivals behind, and all 17 of the various initiatives have
been deemed commercially viable independent of their
"green" angle. Sign Up for The Rude Awakening Start your mornings off with a dose of Rude news. The Rude Awakening is dedicated to highlighting phenomena in the financial markets that others may not see. Let the Wall Street Journal and the New York Times "break news." Sign up FREE Today! We will not share your email address with anyone else, period.
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Jeff Immelt: Not Just PR
Is the change meaningful, you ask, or is it just smoke and
mirrors? The question is a fair one. Many industrial
companies have tried casting themselves as green-friendly
over the years, in a cynical effort to improve their public
image and generate positive press. But in General
Electric's case, this is no mere PR posturing. Words are
being backed up by visible action, coherent long-term
strategy, and some very big bets. In regard to the new
"green is green" direction, The Economist observes that
"Mr. Immelt is embarking on the most ambitious and risky
strategy for GE since the 1980s," when Immelt's predecessor
Jack Welch earned the nickname "Neutron Jack" for laying
off 100,000 workers and rebuilding the company from the
ground up.GE has a long history of creative destruction and strategic
rebirth. Based on the company's history, it is practically
an obligation for each new leader to dismantle and recast
the vision that came before him. Jerry Useem of FORTUNE
expounds on this venerable tradition: "During its 125-year existence, the General Electric Co.
has glowed as steadily as Edison's lamp — even while
continually overturning its own legacy. The only company
remaining from the Dow Jones index of 1896, GE has had
fewer leaders since then — eight — than the Vatican has had
Popes. Each man stepped into the shoes of a predecessor
who, in most cases, was considered the leading
industrialist of his day. Each abandoned the approach of
his predecessor. And each chose a successor who would
change the company's course yet again — a remarkable record
of continuity achieved through periodic revolution. 'What
GE seems to have a genius for,' says Jim Collins, a
business researcher and author of Good to Great, 'is
picking the right person for the right time for more than
100 years.'" Jeff Immelt: The End of Artificial Precision Has GE once again picked the right man in Jeff Immelt? It
would seem so. While Jack Welch was perhaps the most
celebrated CEO in history — deemed "Manager of the Century"
and "Princess Diana of the business press" — his track
record is not without flaws. Under Welch's reign, GE
developed a reputation for managing earnings, a process in
which detailed estimates and aggressive growth targets were
met like clockwork quarter after quarter. Throughout the
'90s, GE's can't-miss performance was the financial
equivalent of an Olympic archer hitting dozens of bull's-
eyes in a row. Such perfection was clearly artificial,
i.e., too good to be true, but Wall Street loved it. To
explain the silky smooth performance, there was talk of
"long cycle" and "short cycle" businesses blending into
perfect synch with each other, meant to convey the image of
GE as an analyst's perfect dream. After the dot-com debacle and telecom implosion, artificial
precision went out of style. Spectacular flameouts such as
Enron soured the public on shiny front ends hitched to
murky back ends. It was during this hostile time when
questions about Welch's legacy arose. GE's stock price went
from a high of $60 in August 2000 to a nadir of roughly $22
in 2002. Part of that decline could be assigned to the
broad market, but there were also growing accusations of
financial hanky-panky. The company's powerful financial
arm, GE Capital, was looking too much like an opaque hedge
fund for some investors' taste, and Welch's aggressive
insurance acquisitions were smelling more and more like an
earnings-smoothing tool. (Insurance companies are ideal for
managing earnings, because it is so easy to overstate
profits by underestimating future claims.) Bill Gross of
PIMCO Asset Management, an influential money manager known
as "The Bond King," rubbed more salt in GE's wounds by
making public accusations of dishonesty and refusing to buy
the company's commercial paper. There was more legacy tarnishing yet to come. GE investors
looked on in shock and disgust as the details of Welch's
lavish retirement package were revealed by the courts. His
nonfinancial "perks" were estimated to be worth more than
$2 million per year, in the form of private jets, corporate
apartments, financial services and so on. Welch voluntarily
rescinded the perks to spare his company from further
grief. Fittingly, the legendary manager and erstwhile
earnings smoother ultimately decided shuffleboard was not
for him; he wound up at a private equity firm, Clayton,
Dubilier & Rice. Welch's track record of shareholder wealth creation surely
counts as one of the greatest business achievements of all
time, but the company he handed over was not in the best of
sorts when he left. The new CEO inherited all the
headaches. As if that were not enough, Immelt happened to
take the reins three days before Sept. 11, 2001. An early point of order for Immelt was paring back the
insurance side of things, an area that Welch had
aggressively built up through acquisitions. It has taken a
few years to get rid of the undesirable bits, with the
biggest chunk — a property and casualty reinsurance outfit
— bought by Swiss Re in November 2005. While a few small
pieces remain (slated to be sold), Immelt was visibly
pleased to be mostly out of insurance, a business he
described as "a real burden" for GE. In further effort to restore GE's reputation, Immelt
jettisoned the "long cycle/short cycle" jargon and the
high-precision earnings targets of the Welch era, choosing
to emphasize longer-term strategy instead. As a key part of
that effort, Immelt embarked on an ambitious plan to recast
GE as one of the world's leading environmental technology
companies...Check in tomorrow for the rest of the story. [Joel's Note: Alternative energy has captured the
imagination of forward thinking investors all around the
world. Pioneers in bio-diesel research strive alongside
scientists of solar energy and ethanol enthusiasts to
figure out a way to fuel to earth beyond the oil age. One
thing is clear; this is not an investment theme that will
tire. Interest in finding and developing the "new oil" will
not abate. Population increase, environmental disasters,
industrialization and countless other factors work to
deplete our oil reserves every minute of every day. Now you can learn how to start playing the alternative
energy market with Justice Litle's Outstanding Investments.
Dubbed the number one financial newsletter by Hulbert's
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