A Qualitative Assessment of GE's Performance Prospects

• Author: Louis P. Le Guyader
• Date: 01 March 2016
• Published date: 01 March 2016
• DOI: http://doi.org/10.1002/jcaf.22140

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© 2016 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22140

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A Qualitative Assessment of GE’s

Performance Prospects

Louis P. Le Guyader

Jeff Immelt, the

CEO of GE, is roll-

ing out the final

elements of GE’s

reorganization to

produce a stronger,

streamlined industrial

giant that has shed an

increasingly burden-

some finance arm.

Industrials can earn

a higher P/E (price-

to-earnings multiple)

than banks, and some

industrials such as

GE under Jack Welch

earned a supplemen-

tal “premium” in

their P/E. The sim-

plest assessment is that the full

benefits of the reorganization

may take time to emerge as the

aftereffects of divestitures lin-

ger and acquisitions take time

to close and digest; new risks

come with the reorganization;

and the reorganization and the

new business model are exposed

to several layers of new regula-

tions. The final result may not

deliver as clear an industrial

earnings signal as first expected.

It turns out many things

could invade and attack

this “fortress balance sheet”

strategy. This downside risk

is due mostly to externalities.

There is little Immelt can do

over and above his current

actions to offset the risks,

although the reader may differ

with this opinion. This article

will explore the various fac-

tors that play against Immelt’s

well-considered and adroitly

executed strategy to answer

the question: “What could go

wrong?” This risk assessment

begins with a discussion of the

timing of his strategy

in the context of the

current capital mar-

kets for equity securi-

ties; the P/E and high

stock price dynamics

he expects are not

“sure bets.” The

analysis will then

review a number of

balance sheet issues

that could interfere

with the produc-

tion of the ROE

(return-on-equity;

the ratio of earn-

ings to equity) that

feeds into that P/E

dynamic. Finally,

the analysis considers the two

factors that play into offset-

ting these risks. This analysis

begins with a brief review of

the stock price dynamic Immelt

is banking on.

STOCK PRICE DYNAMICS

By a price dynamic I

mean the way GE’s stock

price reacts to its earnings,

and whether or not this reac-

tion is more or less favorable

than the stock price reaction

In this article the author discusses the final ele-

ments of GE’s reorganization plan to produce a

stronger, streamlined industrial giant that has

shed an increasingly burdensome finance arm.

The simplest assessment is that the full benefits of

the reorganization may take time to emerge as the

after-effects of divestitures linger and acquisitions

take time to close and digest. New risks come

with the reorganization; and the reorganization

and the new business model is exposed to several

layers of new regulations. The final result may not

deliver as clear an industrial earnings signal as

first expected. The plan may not be executed as

cleanly as expected, making that signal noisy.

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