On June 21, 2014, Alstom SA’s board approved General Electric’s (GE) bid to buy Alstom's gas and steam turbine-making operations for $17 billion. This article looks at the positives for GE from the deal and the other critical factors that make GE a good long-term investment.
The Deal And Its Positive Implications
The board of Alstom SA unanimously approved GE’s $17 billion offer to buy Alstom’s energy business. As a first positive, the transaction enhances GE’s position as one of the most competitive infrastructure company. Alstom will bring complementary technology and global capability for GE, which will yield positive results in the long-term.
The transaction will result in an incremental EPS of $0.08 to $0.10 for GE by 2016 and this underscores the attractiveness of the deal. Further, on an immediate term, the deal is expected to have an incremental EPS impact of $0.04 to $0.06 on for GE.
The acquisition will also provide a cost synergies opportunity and GE expects cost synergies of $1.2 billion in the fifth year starting with cost synergies of $300 million in the first year.
In terms of capacity and revenue visibility, the acquired business has an installed base in excess of 350GW along with a $38 billion order backlog. Considering the acquired company’s LTM revenue of $20 billion, the current order backlog gives a revenue visibility of 2 years.
Further, with 85% of the revenues outside North America and approximately 80% of the revenue from outside Western Europe, the acquisition provides emerging market footprint for GE. Therefore, the incremental EPS growth from the acquisition is likely to be robust over the long-term.
Strong Revenue Visibility And Financial Position
As of 2013, GE had an order backlog of $244 billion, which is 2.4 times the company’s FY13 revenue. A robust order backlog ensures that the company’s earnings remain stable in the foreseeable future.
GE is also well placed fundamentally with a strong cash position of $89 billion as of FY13. GE also generated an operating cash flow of $28.5 billion for FY13 and a robust cash inflow allows GE to create shareholder value through dividends and share repurchase, besides going for organic and inorganic growth.
For the period 2010-2013, GE has returned $26 billion to shareholders through dividends, $19 billion through share repurchase and has invested $23 billion in attractive merger and acquisition opportunities. This gives a sense of the strong shareholder value creation initiatives by the company.
In February 2013, GE authorized a share repurchase program of $35 billion through 2015. The company already made share repurchase worth $10 billion in 2013. With $25 billion still remaining under the share repurchase program, the EPS is likely to get a strong boost over the next two years.
In terms of dividend declared, GE’s dividend payout has increased from a low of $0.46 per share in 2010 to $0.79 per share in 2013. At a current market price of $27, this translates into a good dividend yield of 3.3%. The dividend payout is likely to increase in the future considering the organic and inorganic growth expected.
Growth In The Oil & Gas Segment
GE has been exhibiting steady revenue trend across all segments of its business. However, I am very bullish on the company’s oil & gas business segment.
The business segment revenue has increased from $9.6 billion in 2009 to $16.9 billion in 2013. The strong growth (organic and inorganic) is likely to continue for this segment over the next few years. Currently, the oil & gas segment has an order backlog of $19.7 billion, which gives one a one year revenue visibility.
The reason for the bullish outlook on the segment is the growth in the industry coupled with the company’s offerings. The company’s Oil & Gas segment supplies mission critical equipment for the global oil and gas industry throughout the value chain.
With the US shale boom coupled with an offshore oil & gas boom, the segment is well placed to grow at a robust pace over the next few years and have a significant incremental impact on the company’s EPS.
General Electric is well placed in terms of fundamentals and in terms of industry leadership to grow and create shareholder value in the long-term. The company’s recent acquisition of Alstom’s energy business is another feather in the company’s cap. With a strong order backlog and an equally strong cash position, GE will continue to create shareholder value and is a good stock to own for the long-term.