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Investors Should Add General Electric to Their Portfolio

July 24, 2014 | About:
abirk

abirk

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General Electric Company (GE) is a diversified technology and financial services company. The products and services of the company range from aircraft engines, power generation, water processing and household appliances to medical imaging, business and consumer financing, and industrial products. It serves customers in more than 100 countries. It is a conglomerate involved with just about everything consumers come into contact with. In almost everything we do, GE plays a role in providing electrical boxes, light bulb, and appliances in our homes to providing the infrastructure to capture oil and gas, the conversion to electrical energy, and the infrastructure to support that delivery.

GE acquired a number of public and private companies to support the efforts of the company to grow the industrial business over the past year. GE has acquired companies in the aerospace, machinery, defense, oil and gas, building construction, and engineering industries (estimated total value of $466 million). It made the most publicized acquisition of Lufkin Industries Inc. (LUFK) which is currently in the works. Acquisition of Lufkin will result in market leadership and synergy benefits of GE.

Performance at a Glance

In the second quarter, General Electric reported 3% revenue growth and 13% net income growth. The industrial segment profits rose 9% in the second quarter to $4.2 billion. The dividend yield currently stands at 3.38%. Furthermore, General Electric offers potential shareholders the opportunity for capital gains as well as income production with the stock currently selling at a significant discount. G.E. reported net income of $3.5 billion, a 13 percent increase from the year-earlier quarter. Industrial sales rose by 6.5% to $26.10 billion.

Management has decided to initiate a $3 billion initial public offering (IPO) of Synchrony Financial, its North American consumer finance business. The move is a part of the company’s long-term strategy to shrink its financial arm, GE Capital, which it has been striving to do since the credit markets froze in the financial crisis.

Aviation and energy are powering the majority of growth thanks to secular trends and would be worth $90 and $36 billion on a stand alone basis. G.E., the largest industrial company in the United States, said revenue from its industrial businesses, with products including jet engines, power generators, oil field machinery and medical imaging equipment, rose 7 percent. The company’s three largest industrial businesses — power and water, aviation, and oil and gas — all reported strong growth, ranging from 10 percent to 20 percent.

The General Electric-Alstom Deal

GE bought Alstom's power business for $17 billion in the first half of 2014. With this deal, GE has further cemented its foothold in the power and energy segment, and management expects significant synergy gains. With This deal, GE will have improved access to markets in Europe. Alstom Grid is a world leader in energy management systems, where GE is relatively weak. Meanwhile, GE has had some success in distribution management systems and outage management systems.

Under the deal, GE will acquire Alstom's gas turbine and international steam turbine businesses, while politically sensitive technology—turbines for nuclear plants, power grid equipment and renewable energy products—will be held in 50-50 joint ventures with Alstom.

Growth Plans

GE opened a fuel-cell testing and research facility in upstate New York that will produce its first systems by the end of the year. GE has developed a solid-oxide fuel cell that converts about 65 percent of the energy in natural gas to electricity through a chemical reaction. GE’s 17-member fuel-cell team is planning a pilot factory in Saratoga Springs, New York, and expects to begin commercial production in 2017.

GE’s aviation division announced that it selected Auburn, Alabama, as the location for its new high-volume 3-D printing operation. This facility will be the first of its kind to mass produce 3-D printed components for the jet propulsion industry. More specifically, GE will use the 3-D printing operation at this facility to manufacture fuel nozzles for its new Leap jet engine. The new engine is already General Electric’s best-selling engine of all time. General Electric has already booked $78 billion worth of orders for the new LEAP engine set to go into service in 2016. Over 6,000 confirmed LEAP engine orders from 20 countries have been booked. General Electric plans to open another assembly plant in Indiana specifically to build the new LEAP engine.

SpiceJet Airlines has selected GE’s Flight Efficiency Services (FES) to support its fleet of 52 Boeing 737 and Bombardier Q400* aircraft. GE will provide flight data analytics and fuel management to optimize the airline’s operational efficiency with the goal of substantially reducing fuel expenses for the airline.“India has among the highest jet fuel prices in the world,” said Alan Caslavka, president of Avionics & Digital Systems for GE Aviation. “We are excited about the partnership with SpiceJet and look forward to working with them to realize substantial savings.”

Deliveries for the program will begin in late July 2014. GE’s Flight Efficiency Services, which is widely recognized as the premium product in its class and in fuel efficiency management software worldwide, is used by a large number of the leading airlines worldwide. Its introduction at SpiceJet aims to help the airline reduce its annual $600 million fuel bill, which is the largest cost component for airlines in India. GE will provide consultation and evaluation services with the aim of reducing the airline’s fuel consumption and carbon emissions. GE is also designing and implementing custom solutions for SpiceJet and performing on-going efficiency measurements

To End Up With

A very important point which needs to be reiterated is that the company's strategy is very well thought out. The investments are diversified across the globe and the horizon of investments is long enough to nullify some short-term risks like foreign exchange volatility. The solid growth of the overall industrial business helps further the G.E. strategy. The company is expected to create shareholder returns. It is consistently returning about 6.5% to shareholders which is very good.


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