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Why a Surge in GE Stock? See Your Analyst

December 05, 1986|JAMES FLANIGAN

What accounts for the spectacular run-up in the stock of General Electric? GE's price rose $3.625 a share on Wednesday to $88.50 a share, a leap that added a cool $1.7 billion to the company's market value. And that was only the culmination of a recent surge in GE stock that has pushed the price up more than 20%, or $15 a share, since Oct. 7, when the Fairfield, Conn.-based firm reported its third-quarter and nine-month earnings. Why such buoyancy?

Credit the power of perception. There's nothing much new in GE's $40-billion (sales) business, but Wall Street's stock analysts have become enthusiastic ever since GE reported a contribution to its third-quarter profits from RCA--the broadcasting and electronics giant it acquired in June.

The analysts, who had expected RCA's absorption to hurt GE profits temporarily, were pleasantly surprised and that only heightened anticipation for the meeting 170 analysts had with GE management on Tuesday in New York.

At the meeting, GE Chairman John F. Welch Jr. said that GE "could" show double-digit increases in earnings in 1987 and 1988. The analysts interpreted that to mean at least 15% a year and adjusted their projections for GE earnings: The $5.50 a share they are predicting for 1986 now becomes something over $6.30 in 1987 and more than $7.25 a share in 1988. On their expectations and advice, institutional investors promptly raised GE stock to a new high level (and took some profit on Thursday, when GE dipped back to $87.375 a share).

Mistaken Impression

So, from Oct. 7 to the present, more than $7 billion has been tacked on to the market value of GE because company management first corrected a mistaken impression of the analysts and then gave them a nod and a wink about the next two years' earnings.

But if the higher price doesn't seem to reflect much real analysis, it is at least as sound as the relatively low price that GE sold for earlier this year. Then, the analysts and their investor clients were disinclined to hold GE stock because its earnings growth in the first two quarters--5%--was below the 10% annual growth the company had produced in the last four years. That was when one institutional money manager, unembarrassed at his short-term focus, told GE's investor relations manager, David St. Laurent:

"Look, we don't care about your enterprise, or any enterprise. We want results today."

How does a large industrial company deal with such a crazy system? Deferentially, with the pragmatic attitude that the investment community's demands must be dealt with like those of any other constituency. GE's top managers meet with small groups of analysts twice a year, and various corporate representatives travel around the country meeting regularly with analysts and money managers.

Their Pay Is High

The analysts? They are people who make quite a good living following specific companies. Analyst incomes range from around $60,000 a year to upward of $350,000, with bonuses.

The way it works, an analyst for a brokerage company writes a report and circulates it to investing institutions--insurance companies, bank trust departments, pension fund management firms.

If any of these investors decide to buy a particular stock, they might give brokerage business to the firm whose analyst helped in their decision. That means commissions, which can be sizable--GE's 2.6 million shares traded on Wednesday probably generated more than $150,000 in commissions for various brokerage firms--and bonuses for analysts who were quick to upgrade their earnings estimates following GE's meeting.

What does this system have to do with the long-term strength of American business? Happily, not as much as some think. Stocks, as they say on Wall Street, are sold not bought. And securities analysts, for all the pretense to superior judgment, are part of the brokerage house's sales effort. So while big companies may court them, they can't afford to base their business decisions on analysts' perceptions.

GE, for example, has been investing $2 billion a year in this decade to upgrade its manufacturing and prepare its businesses for the global marketplace. But returns on such investments are mainly in the future because the world economy is not growing very fast at present.

The company, for example, now has the world's most efficient locomotive plant, but there are few orders in the 1980s for locomotives. It is using spare cash flow from RCA to support its electric-turbine-generator business now, in anticipation of growth markets in the 1990s that GE, as well as several Japanese and European competitors, look forward to. In short, it is investing in this decade in order to prosper in the next. Are the securities analysts crediting that long-term vision in their earnings estimates this year? Not really. That's a whole three years away, after all, and they have trouble thinking beyond the next quarter.

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