Everyone has seen the report from General Electric Co. (NYSE: GE) regarding Friday’s earnings.  This report and the current situation remains a glass half-full and a glass half-empty depending upon your time frame and depending upon your outlook of the conglomerate with a safety in numbers or depending upon a sum of the parts for individual growth metrics.  But a673b.bigscoots-temp.com got about 20 minutes in an exclusive telephone interview with CFO & Vice Chairman Keith Sherin to discuss some of the longer-term issues we are interested besides what was addressed in the company’s conference call.

Specifically, I asked Mr. Sherin about several key growth aspects for the company that have a secular or long-term growth model in infrastructure, Ecomagination, GE Oil & Gas, Medical, Airlines and transports, Finance, media, and more.  We also were able to discuss many of the divestiture plans.

First and foremost, we asked about a takeaway for the remainder of 2008 and into 2009.  To this Mr. Sherin seems more than confident about the global opportunities for the company as a whole.  He does expect some of the macroeconomic problems of today to continue and some parts may even get worse than today. But with a $55 Billion backlog in major equipment he feels the company should have a cushion and also addressed how the company has taken many steps to insulate itself against those possibilities.  On a specific basis, Mr. Sherin noted, “There is no Armageddon scenario” in regard to my bringing up the challenges in the economy.

One key issue I wanted to address was the company’s internal growth expectations for its return on capital in each of its units.  Last summer Mr. Sherin mentioned the 20% hurdle as a general goal inside the company for each of its unit combined.  I asked specifically about this to see if this has come down because of the current environment and specifically asked if a range of 12% to 16% might be more realistic.  Sherin said that despite macro-issues, the 20% does remain as the company’s goal.  I would stress that this does not translate to 20% EPS growth as a forecast because this is a different metric.  But the company is still maintaining this as a long-term internal target.  Furthermore, Mr. Sherin said that in evaluating outside opportunities there has to be a minimum of 15% in return on capital for them to be considered.

As far as individual sectors inside the company, GE continues to see strength in the financial sector and Sherin noted, “We feel very good about our financial services business model.”  In response to many of the concerns around many major financials and GE in particular over recent weeks, Mr. Sherin noted specifically, “We do not have a burning platform in our financial services.”  The company has unloaded mortgage operations before the mess started and you probably saw it has unloaded its Japanese lending last week.

GE ENERGY is an area that the company sees as a huge opportunity for many many years ahead.   GE was never mentioned by anyone anywhere just a few years ago in the oil and gas sector, but this is becoming a larger and larger operation via acquisitions and organic growth.  Mr. Sherin noted that he would like to see this area “double or more” over the next five years.  As far as his belief in this sector, he even went as far as saying analogously that he thinks engineering in energy related fields was where he’s told his kids to focus on for an education for the next generational opportunity ahead.  While he did not offer any specific long-term growth targets for the Ecomagination unit as a whole, Mr. Sherin specifically addressed the wind and solar opportunities there as being incredible for GE and he further went into outlining some of the growth areas there.  More specifically, and something we haven’t heard much of before, Sherin discussed how GE wants to become a major player in the batteries for alternative and renewable energy sector.

GE’s focus on healthcare is an area that the company noted last summer at a luncheon as an arena that the company would like to grow in, and Mr. Sherin noted that the company does have a “green-light” to expand in this sector as opportunities arise.  While GE did have to pull the plug on the old Abbott diagnostics business acquisition, the desire to continue growth in the sector from last summer is not one that has seemed to change at all.  The diagnostics area is a potential and Mr. Sherin also noted areas such as Healthcare IT for electronic medical records.  He further went on to discuss in life sciences the proof of therapy for genetics and identified how the company wants to play its part in the personalized medicine trends that are coming in the near future.  Unfortunately there are too many companies in each of the sectors for us to be able to guess an exact company name that could be the next GE takeover candidates in 2008 or beyond.

Another sector we wanted to address and discuss was the current situation in the airline industry since GE has taken an active lender status here and also has a massive business in the jet engines and servicing the engines for airlines.  More specifically when I brought up our own fears about the chances of major legacy air carriers having to file bankruptcy in late 2008 or into Q2/Q3 2009 Mr. Sherin was more than prepared to address this as to GE’s stance.  He noted first and foremost, “We’ve been through airline bankruptcies before” and further stated “Our collateral position (in the airline sector) has improved since after 9/11.”  He explained that GE isn’t in the same boat as equity investors and they are much higher in the creditor line if this was to occur.

Lastly we discussed NBC-Universal and the role of media inside GE.  Sherin maintained the same tone that Jeff Immelt has stated and that NBC’s chief Jeff Zucker has taken that this remains an integral part of GE.  When asked what the internal valuation is regarding the unit, Sherin gave a figure of $40 Billion as the total value of the media unit.  If the company is going to change that stance of GE being NBC-Universal’s parent as many want to see changed, well let’s just say that the company does not want to fuel any hopes of a change there at all.

While shares are down in this Monday’s trading, we would note that despite the sell-off we saw in recent months GE was one of the few gainers during a very weak stock market.

We gave our own 2008 fair value stock assessment on GE based upon guidance after its last big post-earnings drop.  General Electric has also been reviewed for our next SPECIAL SITUATION newsletter with scenarios that could help GE’s stock be able to surpass that level under the right scenarios even in a market-neutral environment.

Many of the issues around GE as an investment today are really going to depend upon your time frame.  The company does have a united message and does have the goal of streamlining operations.  The company also has a solid backlog and there is a definite break between how Wall Street is viewing some of the company’s exposure to macro-aspects versus the company’s comfort level on how it evaluates the current environment and its opportunities that arise.  Whether this happens in 2008 or in 2009 there is one thing for sure: the GE of tomorrow is going to look very different from your parent’s version of GE in the past.

Jon C. Ogg
July 14, 2008

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