- - Sunday, April 13, 2014

NEW YORK — Early Thursday morning, GE is set to release its high-level review of first quarter 2014 financial and operating results.

Because GE is so large and so active in so many places, investors and analysts will pour through the company’s disclosures to divine whether the long-hoped-for global recovery is progressing, stalling or running in reverse.

Unlike during the Jack Welch era, when GE’s common shares soared from a split and dividend adjusted basis of $ 0.52 per share to $ 40.50 on Sept. 6, 2001, GE’s common share price of $25.43 at the end of last week was 37 percent under its closing price the day before current CEO Jeff Immelt took the reins from Mr. Welch.

Granted, external conditions from April 1981 to early September 2001 were much more favorable than Mr. Immelt has faced, but the contrast in performance is stark.

Under Mr. Welch, patient investors reaped a gargantuan financial return. Under Mr. Immelt, the numerous corporate finance moves, the external benefits of suppressed benchmark interest rates, and largesse available from government stimulus programs inside and outside America have all failed to produce financial returns for GE’s investors, who have suffered too patiently for nearly 13 unlucky years.

So far, GE’s board of directors have demonstrated little stomach for trying new leadership, perhaps because the directors have concluded Mr. Immelt and his team have made the best of a truly difficult set of circumstances.

If investors cannot realistically hope for more inspired and effective leadership anytime soon, why should they continue to hold onto GE common shares?

More time for Immelt?

One argument advanced for holding on to GE common shares is made by those who have a low tax basis because they purchased them so many years ago.

These seemingly shrewd investors earn attractive quarterly cash dividends at yields on the market price of GE common shares far higher than dollar-based interest rates. In addition, longtime investors defer paying large tax bills on their long-term capital gains.

But is holding on to GE common shares wise, as turmoil mounts?

Though financial regulators still allow GE to characterize itself as an industrial concern, manufacturing “electronic and other electrical equipment,” the company holds a significant investment in General Electric Capital Corp. (GECC).

As of December 31, 2013, GECC had shareholder equity of $82.7 billion, an amount that was 60 percent of GE’s total shareholder equity of $136.8 billion, meaning that a solid majority of GE’s overall equity was committed to financial endeavors.

Disconcerting picture

Digging a bit more deeply, the picture seems even more disconcerting, especially if you are worried about rising inflation and heightened geopolitical tensions that could lead to abrupt upward movement in interest rates and sharp declines in asset prices.

Using a 1.39 multiple on GECC tangible book value, we arrive at a “market” valuation for GE’s financial services business of $76.4 billion. Subtracting this estimate from GE’s total market value, we arrive at a $ 179.4 billion preliminary valuation for GE’s non-financial businesses.

How have these businesses performed and what does the future hold for them?

These are questions that Mr. Immelt and his team likely will have difficulty addressing. By my calculations, using GE’s audited results, revenues for the non-finance businesses went from $98.3 billion in 2011 to $102.0 billion in 2013.

In contrast, cash flow from operations, net of capital expenditures, fell from $8.7 billion in 2011 to just $5.7 billion in 2013.

An implied valuation for GE’s non-financial businesses of more than 31 times free cash flow seems excessive, assuming that management can replicate the financial results delivered in 2013 during 2014.

Jeff Immelt and his team have much to explain this Thursday.

Charles Ortel serves as managing director of Newport Value Partners (newportvalue.com), which provides economic research to executives and to investment firms.

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