In one of its most significant and strategic moves in years, General Electric Co (GE, Financial) is choosing to no longer be a bank and get rid of the majority of GE Capital, the powerhouse of a finance business that used to account for half of GE’s profits but whose risks have shaken investors. GE plans to sell the majority of its $30 billion real estate portfolio by 2017 as it goes back to its industrial roots. It will be setting up a share buyback plan of up to $50 billion making this the second largest buyback in history.
By 2018, over 90% of GE’s earnings will be seen coming from its core industry businesses.
At Friday’s premarket trading, GE’s share prices surged by 7% after they announced the potential in returning more than $90 billion to investors between now and 2018. Revenue from the company’s real estate business dropped a shocking 24% last year, in part due to a decrease in net gains on property sales.
Management Talks
GE Chairman and CEO Jeff Immelt said ‘This is a major step in our strategy to focus GE around its competitive advantages. GE today is a premier industrial and technology company with businesses in essential infrastructure industries. These businesses are leaders in technology, the Industrial Internet and advanced manufacturing. They are well positioned in growth markets and are delivering superior customer outcomes, while achieving higher margins. They will be paired with a smaller GE Capital, whose businesses are aligned with GE’s industrial growth.’
Valuation Equations
In a deal being valued at around $26.5 billion, Blackstone Group LP (BX, Financial) and Wells Fargo & Co (WFC, Financial) will be buying the majority of GE Capital Real Estate. All that will be left of GE Capital between now and 2018 is GE Capital Aviation Services, Energy Financial Services and Healthcare Equipment Finance – its three vertical financing businesses.
The roadmap
Under this new plan, GE forecasts that in 3 years’ time more than 90% of its total earnings to be created by its high performing industrial businesses. Looking at 2015, these high performing businesses are on track for operating EPS of $1.10 to $1.20, a rise in double digits.
GE has discussed a plan of action with regulators, certain parts that are subject to regulatory review and approval. GE plans to work closely with the Financial Stability Oversight Council to determine and carry out the actions needed to de-establish GE Capital as a Systemically Important Financial Institution (SIFI).
Real estate investments and lending don’t exactly go hand in hand with GE’s forte of aerospace engineering, turbine creation and medical technology. Finance however has proven to be massive business for the company. Mr Immelt’s strategy of ploughing billions of revenue into property and diversified investments in search of profits worked until the financial crisis rocked GE in 2008 and 2009, forcing the company to slash its dividend and turn to the government for lending programs and support.
Analysis
The market is seeing General Electric as a BUY stock for now. Many positives drive this decision that will have a bigger impact than any of GE’s weaknesses, while providing investors a much better performance opportunity. GE’s strengths include its revenue growth, growth in EPS, impressive growth in net income, attractive valuation levels and fast growing profit margins. These strengths outweigh the weaknesses that include the company’s obvious high debt management risk. Hence we would recommend a BUY on GE for now to earn better value after the restructuring is done.
