GE pummeled by Wall St. illogic

General Electric's Jeff Immelt cannot seem to please anyone. In April, when the company reported first-quarter earnings per share that came in 7 cents shy of expectations, traders hammered GE stock and numerous analysts renewed their longstanding demand that Immelt "break up the company" by selling off various underperforming divisions.

Few news accounts that week failed to note that since Immelt had taken over from Jack Welch as captain of the sprawling industrial and financial giant, share prices had fallen 25 percent.

But when Immelt recently announced that GE would sell its appliance division, which had equipped American households with stoves and refrigerators for more than a century, others complained that it was another sign of the uncompetitiveness of the U.S. manufacturing sector, even at a company renowned for deep pockets, global reach and Japanese-like efficiency.

The irony, of course, is that Immelt probably is one of the best corporate executives on the planet. In six years he has managed to increase GE's revenue 60 percent and double its profit while shedding $80 billion worth of assets and buying $50 billion worth of others.

Don't get me wrong, Immelt has made his share of missteps. In hindsight, it is clear that he should have resisted the urge to join the rest of the financial sector and jump with both feet into the subprime mortgage market in 2003. He made noises about selling off some or all of GE's consumer-facing businesses, from dishwashers to credit cards to old-fashioned light bulbs, but it's a bit late into the global downturn for a company that likes to boast of knowing when to buy and when to sell.

Nor has Immelt articulated, in any convincing way, how owning television and cable networks and theme parks and overpaying for Hollywood studios fits with the "core" strategy of an industrial conglomerate that produces and finances everything from airplane engines and railroad locomotives to medical equipment and water treatment plants.

But that's the thing about General Electric. Its genius has always been in its ability to update its portfolio constantly, moving out of low-margin commodity businesses while using the cash and knowledge it has generated to move up the value chain.

Unfortunately, under his predecessor, this wonderful reputation somehow got transformed into a solemn promise to deliver double-digit earnings growth every quarter, and to do so in a way that precisely matched the earnings guidance provided by the company. To meet those expectations, GE has become suspiciously adept at booking revenue and expenses and timing asset sales to meet earnings estimates with amazing precision and consistency.

The extent of this earnings management was revealed last month when an embarrassed Immelt explained that GE's failure to hit its quarterly number was a result of the credit crisis, which in the last two weeks of the quarter had suddenly and unexpectedly reduced the market value of securities holdings and prevented the company from completing anticipated real estate sales.

But rather than acknowledging the folly of predicting quarterly results in the midst of a financial panic and worldwide economic downturn, particularly for a company reliant on financial services and "lumpy" industrial sales, Immelt prostrated himself before analysts and promised it would never happen again.

Analysts, however, were not satisfied, and they jumped at the chance to read into the earnings a fundamental flaw in General Electric's long-term strategy.

"GE has to take a look at the portfolio and reduce the complexity, not only for financial management, but to provide better predictability for investors," opined Steve Tusa, a J.P. Morgan analyst, as if quarterly predictability were the key to creating value for shareholders.

Having decided that GE's earnings surprise was the result of flawed corporate strategy, it was easy for Wall Street's analysts to take the next leap of illogic and conclude that salvation could come only from buying and selling assets. That, by coincidence, just happens to be the only course that generates fees for Wall Street brokers and investment bankers.

If Immelt had dared to tell them the truth, that he needs the cash generated from some of these maturing businesses to invest in new markets and new technologies for the long term, he would have sent GE shares into a tailspin.

Immelt has the right strategy for General Electric, and he's the right man to execute it. But he risks being frustrated in his efforts if he cannot transform his company's relations with investors and opt out of the mindless earnings-expectation game.