General Electric Co, beset by slowing growth and investor concern it relies too much on short-term debt, lost its spot as the world's largest company by market value to Microsoft Corp.
A decline of US$103 billion of value this year sliced General Electric's worth to US$295 billion. Microsoft has shed US$59.6 billion, lowering its market capitalization to US$299 billion.
The slide in Fairfield, Connecticut-based General Electric in the months after Jeffrey Immelt replaced Jack Welch as chief executive officer came as earnings slowed and investors said they were concerned the company hasn't disclosed enough about its more than 20 businesses.
"During the days of Jack Welch, no one asked for break-outs, they were fine with double-digit growth and there weren't any issues with regards to financial statements," said Clay Hoes, an analyst at American Express Financial Advisors, which owns 46 million General Electric shares. "Then all of a sudden you start getting the cracks in the armor on accounting issues and you can't just take it on blind faith anymore.''
General Electric has ranked as the biggest company since April 3, 2000, when it passed Cisco Systems Inc's US$524 billion.
Cisco is now worth US$107 billion. Only seven other US companies have a market capitalization bigger than the US$160 billion combined loss in market value this year at GE and Microsoft.
General Electric shares fell US$0.15 on Friday to US$29.70, bringing its loss for the year to 26 percent. Microsoft gained US$1.03 to US$55.25.
The shares lost 17 percent this year.
While Microsoft and Cisco have tumbled amid a plunge in computer-related shares, General Electric has been penalized by slowing growth in a range of businesses and increased scrutiny of corporate accounting since Enron Corp's collapse last year. GE makes money from businesses including plastics, television and financial services in more than 100 countries.
General Electric has retired US$23 billion, or almost 20 percent, of its commercial-paper debt this year after some investors and credit-rating companies urged it to reduce its reliance on such short-term IOUs.
"We are focused on delivering for customers and we are on track for 17 to 18 percent earnings growth this year," said David Frail, a spokesman for GE.
James Wineland, manager of the US$5.6 billion Waddell & Reed Advisors Core Investment Fund, said he doubts the company can meet that forecast this year. He cited sluggish demand at the financial services and power systems units.
"We didn't think the growth rates could be sustainable," said Wineland, who sold the last of the fund's 4 million GE shares in March. "The sum of the parts doesn't add up to the forecasts for growth."
GE Capital Corp, the largest non-bank finance company, generated about 40 percent of GE's profit in last year. Power systems accounted for about 20 percent. The company has reduced its forecast for turbine orders as energy companies such as Calpine Corp. and Dynegy Inc cut spending.
GE shares are also more expensive than other financial companies, Wineland said. GE trades at 18 times next year's earnings estimates while Citigroup Inc sells at 12 times and Capital One Financial Corp, a credit card issuer, sells at 15 times forecasts.
"The financial arm is such an important part of the overall earnings picture" and "compared to a basket of financial service companies, it has one heck of a premium," Wineland said.
Other investors say General Electric is a buy, as its shares trade under US$30 for the first time in 3 1/2 years.
Rees Peterson, an analyst at Wells Fargo Private Client Services, is recommending the stock to money managers at the San Francisco-based firm that oversees client assets of US$40 billion.
He says concerns that earnings will slow are overblown. Wells Fargo Bank NA already owned 73 million GE shares at the end of the first quarter, according to regulatory filings.
GE's medical unit will grow by 20 percent a year the next few years, Peterson says, picking up the slack from the declining sales from its power unit. Television and plastics revenue will also rise, he said.
Peterson said GE shares should be about 15 percent higher based on valuations investors have assigned to some of the companies' competitors, including Citigroup and United Technologies Corp.
A basket of eight of GE's peers trades at 21 times 2002 profit estimates, according to Peterson. GE sells at 18 times Peterson's estimate, implying a US$35.41 a share target price.
"In the high US$20s, GE is an exceptional value and I am pounding the table on GE under US$30," he said.
Hoes of American Express enlists the help of nine analysts at the Minneapolis-based firm to perform that task. Hoes, a basic materials analyst, concludes that GE is inexpensive based on conversations with the firm's media, aerospace and finance analysts.
He checks demand for appliances by looking at Whirlpool Inc's sales and uses Boeing Co's results to predict demand for plane engines.
Even investors who doubt that GE can achieve its profit targets say they are compelled to own it. The stock accounts for 3.19 percent of the Standard & Poor's 500 Index, the benchmark index for large-cap companies, according to Bloomberg data.
Microsoft now accounts for 3.23 percent of the index.
Allen Ashcroft, who manages the US$400 million ARK Blue Chip Equity Portfolio, said he holds fewer GE shares than its market value warrants. He's concerned that slack demand for aircraft engines and turbines will hamper its overall growth.
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