Even the Best Companies Go Bankrupt
In 1896, Thomas Edison's company, General Electric, was one of the original 11 companies Charles Dow included in his Dow Industrials Index. At the time, GE was making electric motors and dynamos, light bulbs, fixtures, etc.
In 1919, GE bought out Marconi Wireless Telegraph Company of America, and the subsidiary Radio Corporation of America (RCA) was born.
In the 1920s, RCA was a major radio maker, and it also created the first radio broadcast company, the National Broadcast Company (NBC).
In 1928, a Swedish American GE engineer named Ernst Alexanderson made the first television broadcast in America...
GE was making turbosuperchargers for airplanes in WWI.
Think about that for a minute. In a span of 30 years, GE controlled the two most important consumer electronic markets — radio and TV — that would grow for decades. It was instrumental in developing airplane technology. Not to mention its electrical business...
It would go on to pioneer X-Ray machines, vacuum tubes, plastics...
GE products were ubiquitous. The company was like a combination of Apple, Tesla, Google, and Netflix. It's truly incredible.
Until Apple came along, it was the single-best investment in history. And it is the only original member of the Dow that's still around.
Today, we are witnessing the death throes of GE. The stock price has been cut in half over the last year, losing $130 billion in valuation. The dividend has been halved, too. There's even talk that the company should be broken up. What happened?
Going Bankrupt Gradually, Then Suddenly
The decline actually started under Jack Welch, who, if you ask me, is poorly cast as one of the great CEOs of all time. He shifted GE’s focus to finance with GE Capital. GE Capital gave the company some pretty wide latitude to jimmy its numbers. A Businessweek article says:
GE Capital could borrow money in the U.S. to fund offshore businesses in countries where corporate taxes were much lower (or nonexistent), then turn around and use the interest charges on those loans to offset the income from GE’s onshore manufacturing businesses, making its U.S. tax bills disappear. And unlike a factory, GE Capital’s highly liquid assets could be bought or sold at the ends of quarters to ensure the smoothly rising earnings that investors loved. The term accountants use for earnings from these sorts of one-off asset sales is “low-quality”... GE’s net income swelled from $1.65 billion in 1981 to $12.7 billion in 2000... GE’s market capitalization grew from $14 billion in 1981 to more than $400 billion when Welch retired in 2001.
Finance and accounting chicanery is not the same thing as innovation. Yes, earnings and revenue grew. But the company lost its edge. GE remains dominant with jet engines, power generation turbines, and even MRI machines. But it's been a long time since the company resembled Apple or Google.
I will confess: I recommended GE to my Wealth Advisory subscribers in March of 2013. When I recommended selling it a year later for a disappointing 13% profit, I wrote:
General Electric continues to tread water within a dollar or two of our $24 entry price. The company only reported one really good quarter in 2013, and when it matched estimates at $0.53 a share in the fourth quarter, frustrated investors sent the shares from $27 down to an ultimate low of $24.50. We’ve been looking at the GE Capital IPO and cost-cutting initiatives as catalysts to take the shares to our price target of $31. But frankly, with just 7% earnings growth coming in 2015, $31 is too optimistic. Sell it at your earliest convenience...
Yeah, we missed a little upside. And a whole lotta downside.
The Kind is Dead, Long Live the King
My point here is that staying ahead of the curve, anticipating the next technology cycle, is very difficult. The market is littered with the tattered stocks of once-great companies that missed.
Nokia was still the biggest cell phone company when the iPhone debuted in 2007. Blockbuster once turned down a chance to buy Netflix for $50 million. Sears, Roebuck and its mail-order catalog were basically Amazon 100 years before there was an internet.
Both Microsoft and Cisco went sideways for 13 years as they struggled to reinvent themselves after the internet bubble popped. You gotta think they were actually lucky to pull themselves out of their death spirals. And GE was probably lucky to stay on top for 70 years...
Hemingway once used the phrase "gradually, then suddenly" to describe the process of going bankrupt. You could use the same "gradually, then suddenly" to describe how technology cycles have turned over the last 100 years. GE probably benefited from the phenomenon that cycles of innovation used to turn a lot more slowly than they do now...
When I first started in this biz in 1998, I checked out books on fiber optics, lasers, and microwave signals so I could get my feeble brain around how switches and routers worked, so I could understand what companies like Cisco, Qualcomm, Nokia, Lucent, and Global Crossing were doing.
Since that time, the most important companies are no longer the ones that make the internet work. It's the ones that monetize the internet. Facebook, Google, and Amazon. I'm not sure there's even time for a book before the next cycle is upon us.
Not only are cycles turning faster, but they also seem to be converging. Take the oil sector. Artificial intelligence and automation have dropped the cost of U.S. shale oil from over $60 a barrel to under $30. That's helped U.S. oil companies beat the Saudi overproduction gambit and effectively kill OPEC. Now Saudi Arabia itself is suddenly facing its own GE moment. Its petro-society is failing, and it must innovate or die.
And the entire fossil fuel complex is facing an existential threat from renewables. Ford and GM will likely be OK as the shift to electric cars goes from gradual to sudden. But what about ExxonMobil? Where will that company be in 20 years?
What about our utility companies that are still wedded to fossil fuel technology and a distribution model that may already be obsolete? Did you know that electricity on the grid peaked in 2007? Or that the average American household uses 10% less power than it did just a decade ago, largely because appliances are so much more efficient? (My Wealth Advisory subscribers are positioned for a huge win as utility companies inevitably lose their quasi-monopoly)
There's only one thing certain out there: things change. And today, change may be coming faster — and with deeper ramifications — than ever before.
It took GE a gradual 70 years to become the best investment in history. Apple beat GE's accomplishment in less than 15 years. There's probably a new challenger out there right now, ready to take the crown even faster.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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