T h e Mi s s T h a t Hi t L i k e a B o mb s h e l l

16

CHAPTER

509

In March 2008, CEO Jeffrey Immelt announced
to security analysts that all of GE’s divisions
were hitting their earnings targets and that the
firm would enjoy double-digit growth for the
year. According to Immelt, GE’s global portfolio
of businesses, which ranged from nuclear
power plants to TV networks and movie stu-
dios, stabilized earnings and protected the
company from economic shocks such as the
subprime mortgage debacle. GE’s stock
responded nicely, rising from $32 to $38 per
share. However, less than a month later Immelt
held another televised news conference where
he announced that GE’s first-quarter earnings
were down 5.8%, with similar declines likely for
the rest of 2008. GE’s stock plunged, lowering
stockholder wealth by about $50 billion in just
one day.
Immelt’s announcement delivered a blow to
GE’s reputation and credibility. Investors set stock
prices based on information and recommenda-
tions from the security analysts who work for the

large investment banks and brokerages. Analysts

study historical data, but they recognize that

companies’ managers have the best information

about future earnings. Therefore, if a company is

“credible” and can be trusted, analysts base their

forecasts heavily on information like Immelt pro-

vided in his March forecast. Each analyst pro-

duces a “target price,” which is essentially his or

her estimate of the stock’s intrinsic value. The

brokers of the analysts’ firms then use that infor-

mation when they make recommendations to

their customers. Immelt’s initial forecast led to

buy recommendations and GE purchases, but

the quick retraction led to substantial losses and

unhappy customers. Those customers let their

brokers know how they felt, and those feelings

were relayed to the analysts and then to Immelt;

and he probably called some of his subordinates

to task. The whole episode was embarrassing to

Immelt and to GE. GE’s board must have been

unhappy, which is not good for a CEO in an era

when CEOs can be easily replaced.

Financial Planning

and Forecasting

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