As GE’s stock struggles to hold $7 $6, a level at which it is still arguably expensive (17X cash flow), shareholders are calling for CEO Jeff Immelt’s head.
And it’s true: Jeff has had 7 years to reduce GE’s dependence on the business that is sinking the ship–GE Capital–and he has chosen not to do so. Until last fall. When it was too late.
But let’s not forget who built GE Capital in the first place: GE’s legendary CEO, Jack Welch.
True, Jack Welch left the company eight years ago, but his legend–and legacy–live on. Thanks to Jack, Jeff inherited a company that was highly dependent on a financing business, one that already carried more than $300 billion in debt. (The total is now more than $500 billion).
It was in no small part this debt load that allowed Jack Welch to post his legendary (and eerily consistent) earnings numbers over his 20 years at GE’s helm. It is also this debt load that is crushing GE shareholders today.
GE’s round-trip from $7 to $40+ to $7 has now eliminated much of GE’s stock appreciation during the legendary Welch’s reign. If GE were valued at a more reasonable multiple of free cash flow (say 10X), all of the stock’s appreciation during Welch’s tenure would be wiped out (and then some).
So as GE shareholders gaze in disbelief at the stock’s shriveled remains, they should direct at least some of their frustration at the man who transformed GE from an industrial company to a bank in the first place.