General Electric: Back in the Spotlight

Shares of General Electric have languished for seven years. They peaked in July 2000 at $60.50 and closed July 13 at $39.50, still 34% below the record high.

Chief executive Jeff Immelt, who took over the giant conglomerate shortly before 9/11, has tried to step out of the shadow of his larger-than-life predecessor, Jack Welch, only to see his efforts go mostly unnoticed. "As it has stagnated for much of this decade, GE has become the stock that investors love to hate," says George Putnam, editor of The Turnaround Letter. "But investors are a fickle bunch, and with its great businesses, strong leadership and impeccable balance sheet, GE is bound to get back into their good grace before too long."

A return to grace may already be afoot. The bellwether stock (symbol GE) rose 2% on July 13 after the company reported that second-quarter profits rose 12% from the same period a year ago. Profits from continuing operations climbed to $5.4 billion, or 52 cents a share, which matched analysts' estimates. The company plans to double its stock buyback program, to $14 billion, with $12 billion in stock to be bought by year-end. "Growth is just clicking," Immelt told investors in a conference call after GE released its earnings report.

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Immelt continues to move GE away from financial services. The company plans to sell its subprime mortgage business, WMC, which posted a $200 million loss in the second quarter. Welch turned GE into a financial powerhouse during his 20-year reign as chief executive, with about half of the company's operating income coming from financial services in 2000. Immelt has whittled that number down to about 30%. During his tenure, the company shed its sluggish insurance business and deployed capital into faster-growing areas, such as health care and aerospace.

"Jeff Immelt has been vastly unrated for what he has done," says Jim Hardesty, president of Baltimore investment firm Hardesty Capital Management, which runs $650 million in assets. "The portfolio has shifted rather dramatically under Immelt and the market has yawned." Since 2006, GE has been the top holding in the private and corporate accounts that Hardesty manages.

Emerging markets, such as China and India, are key to GE's growth strategy. These rapidly developing countries need more roads, electricity and water. GE supplies the equipment, services and financing to build and maintain them. Its infrastructure division posted a 23% increase in second-quarter profits and revenues.

Thanks to Boeing's Dreamliner 787 jet plane, GE has some tailwinds in its aerospace division. "The engine business is a good business because once you get the engines in the planes, they have to service them," Hardesty says. The aerospace unit has a $14 billion backlog of equipment orders.

NBC Universal, GE's struggling entertainment division, is a black cloud on the company's growth horizon. It generated only 2% profit growth for the second quarter, with the sleeper hit Knocked Up canceling out the flop of Evan Almighty, the most expensive comedy ever made, during the start of summer movie season. "We have nowhere to go but up with NBC," Hardesty says. "Immelt is a cold-blooded portfolio manager. He is not going to give this thing away at the bottom."

GE bumps up against the law of large numbers. It generated $16 billion in sales last year. The company needs strong growth in revenue and profits to produce the kind of results that will get investors to pay attention. The stock trades at almost 18 times the $2.21 per share that analysts expect the company to earn this year and 16 times estimated 2008 earnings of $2.49 per share.

Yet the company offers investors a safe play on global growth. Putnam, who has produced an impressive stockpicking record at The Turnaround Letter, recommends buying the stock up to $50. Even if GE takes longer to gain the market's favor, "those who buy the stock now will be rewarded by the generous dividend while they wait," he says (GE shares yield an above-average 2.9%). Hardesty expects that GE will beat analyst expectations in the fourth quarter because "the various divisions will be running full tilt." He thinks that will likely be the time when most investors take notice of GE shares. "It's got momentum and is picking up steam," he says.

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