- Markets & Risk Newsletter
|
||||
|
- General Electric: From Rock Steady to Risky Back in the nineteen fifties and sixties, the American dream meant a house in the suburbs, a Ford or Chevy in the garage, a career for Dad, volunteer work for Mom, and maybe a little nest egg of stocks and bonds. The preferred stock? General Electric was at the top of the list. GE was an American institution, founded in 1878 by Thomas Edison, and a mainstay of U.S. technology and manufacturing. Putting your money in GE stock was almost as secure as putting it in the bank. Since 1956 GE had held S&P's AAA rating, and in 1967 the company received Moody's Aaa rating. As the decades passed, GE stock hovered comfortably under ten dollars a share, never straying up or down more than a few points. In 1985 Jack Welch was named chairman and CEO, and he set a course to grow GE and increase shareholder value. When his tenure began the company reported revenues of roughly $27 billion a year; by 2000 revenues had increased to nearly $130 billion. General Electric went from a market value of $14 billion to one of more than $410 billion, making it one of the most valuable and largest companies in the world. Investors were delighted. General Electric stock climbed, reaching a peak in September 2000 of $59.87 per share. Hit by the recession, by February 2003 the price slumped to $22.70 per share, but by October 2007 had rebounded to $41.77 per share. There was no reason to believe that the fundamental value of GE had changed or would ever change. Then investor confidence vanished. GE stock tanked, by March 2009 reaching a low of $6.69 per share. The problem? Worries about GE Capital, with its three subdivisions: GE Commercial Finance, GE Money, and GE Consumer Finance. GE Capital's businesses include private-label credit cards, commercial real estate, lending to midsized companies, and leasing for large equipment such as aircraft.
Despite the downgrade and stock slump, GE is still a global powerhouse, and remains the world's biggest maker of jet engines, power-plant turbines, locomotives, and medical imaging equipment. Other key divisions include lighting, appliances, NBC Universal, water treatment, and factory automation software. These non-finance businesses show fundamental strength. The Hidden Source of Risk Risk is quantifiable if investors can see the inner workings of a company. But risk is also affected by what is unknown, and analysts have learned the hard way to assume that what is concealed must be risky. To many, GE Capital was a closed shop within the larger company, and GE did not provide a breakout of financial information about this division. Much remained hidden, and investors were critical of General Electric for a lack of transparency at the GE Capital finance arm. Responding to investor fears, the company recently hosted a meeting to provide more detail about GE Capital holdings. Analysts remain concerned that the unit, already facing rising credit-card delinquencies and $4 billion in unrealized property losses, will require more capital than GE anticipates. Analysts assert that GE Capital, if it were considered as an independent entity, would be rated in the mid-single-A category. The finance division isn't a bank and its income depends on so-called wholesale funding, or the spread between its cost of issuing debt and lending.
Perhaps if GE had been more transparent investors would have remained confident. In today's investing climate, a company that is not proven by examination to be strong is assumed to be hiding risky business. For information on powerful risk-management tools that allow you to track and measure the risk of global equities, sector ETF's, and basket trades, contact PortfolioScience today. |
© 2000-2009 Portfolio Science, Inc. | ||
|
The RiskAPI® Add-In
Version 3.4.2 Now available.
|
|
|
What's New
Click for all new items: More |
|