Focus on G.E.
Interview: GAM---Abate, James---Fund Manager (slow)
>> Welcome back. abbott laboratories reports a 6% improvement for the latest quarter. excluding one-time items it matched expectations. revenue was up 12%. 78 million of the worldwide sales were for one of its newer products, an arthritis drug. novartis higher today after a study showed its breast cancer drug may prevent recurrences of the disease. the new england journal of medicine reported the drug reduced new or recurring breast cancers by 43%, and cut the death rate from the disease almost in half. chief operating officer david epstein says the result of the study will lead to increased sales.
>> the study itself should help the drug to gain market share. we would expect over the course of the several years we should have several hundreds of millions of dollars from sales. in addition, we are running another study to show the drug su peer your to ta max fin. novartis shares up 1.5% today. general electric, the world’s second largest company by market value, will report its third quarter earnings coming up tomorrow. the company may show a profit decline the fourth straight under c.e.o. jeffrey immelt. the next guest says g.e. is doing a lot of smart things to insure future growth. james abote is the director at gam u.s.a. he has 25 billion under management, manager of their american focus fund.
>> let’s talk about g.e. here. didn’t see the kind of growth in the last year and a half or so that many people came to expect revenue-wise under previous administration. jack welch had a way of getting that done. has it been fair to make a comparison here or do you think g.e. has performed very well under the circumstances?
>> the stock market has voted. and what they have done is removed the premium valuation which has normally been associatewood general electric stock . typically it trades at a 20% premium along a price earnings multiple relative to the s&p 500. that’s been removed. frankly, i think until you start to see capability of double digit growth, general electric’s valuation is going to be at a discount.
>> do you have an expectation that that will ever return?
>> most definitely. we are quite bullish on the stock . it’s our biggest holding in our gam america focus fund. there are a lot of things going on under the surface when you look at general electric. clearly it’s a big beast to get your arms around. there is the financial services business, the industrial business. and what we are seeing is stabilizeation in the industrial business, whether it’s from powergenration or aircraft. they are able to gain market share and really stem the declines that we’ve seen on a year-over-year basis. sequentially the numbers are looking quite good. there is anecdotal information which points to stabilizeation if not growth in the business. the locomotive business, the transportation business based down in erie, pennsylvania, they’ve recalled previously laid off workers, though it’s a small piece of the business, this gives keas kaegss things are stabilized.
>> in other words g.e. is a proxy for the economy.
>> most definitely.
>> let’s talk a little bit about what numbers you are expecting tomorrow. what do you expect to hear tomorrow? do you have any expectation of any surprise from what the market expects?
>> well, the consensus estimates range between 39 and 41 cents for the quarter. the key thing, and maybe it won’t come out in tomorrow’s call, but what we are expecting is investors to start to recognize that next year’s earnings are going to be north of $1.72, perhaps even higher than that. that will get back to a more than 10% year-over-year growth rate in earnings. that is necessary to drive the premium back into general electric stock .
>> now, there has been an additional amount of investment in g.e. this year. we can see a chart going to the beginning of the year, and things have looked up for this stock , though it hasn’t performed as strong as some of the major averages. nasdaq is up something like 44% this year. we do a couple clicks on this screen and we can take it back to the day that jack welch stepped aside and jeff immelt took over. clearly the stock is well off of its high since then. you say, well, here is september 11th. but after that it easily regained those jack welch levels and hasn’t come back to it. when do you expect to see it back up at welch levels in the market.
>> let’s look at the underlying components of the business, what’s happened. aircraft, you’ve had september 11th and just a collapse in not only the domestic but the global airline industry. if you look at powergenration you’ve had a complete collapse in turbines and also plant building for new powergenration, domestically, and you could say the same thing globally. on the financial side which has been the thing that has been able to keep the stock at certain levels, frankly, you’ve had continuing worry that they are taking on too much risk or using the balance sheet in a way which is funding other segments of the business. but you have to look at the financial business, you know, separate from the industrial business in my view. and again, you are seeing stabilization there. they are doing things to take on more risk. again, they have to take on --
>> you mention risk. this media deal is a lot of risk. the vivendi situation, the billions they are spending? they are taking on businesses they wouldn’t have done in the past. two or three years ago there was talk they were thinking of spinning off nbc as a whole.
>> i don’t know if it’s actually an acquisition. what is happening is a joint venture where general electric is contributing assets. vivendi is able to, for lack of a better word, wash their hands of very poor aggregation of assets over a number of years.
>> i understand, but they thought the daimler chrysler merger was a merger of equals and in fact it was a full takeover too. we’ll see how this plays out. don’t think there will be too much day-to-day activity on the nbc empire.
>> u.s. investment director at gam u.s.a., which has 25 billion under management. look at the economy when we return.
