In this article, let's take a look at General Electric Company (GE, Financial), a $275.17 billion market cap company, which sells products ranging from jet engines and gas turbines to consumer appliances, railroad locomotives and medical equipment.
$12 Billion Deal
General Electric will sell its private equity business to the Canada Pension Plan Investment Board, the largest pension fund in Canada. The deal is valued at $12 billion. According to the chief executive, the plan is to have the process completed in two years.
Strategic Change
The strategic change began in April with the sale of debt linked to office buildings and commercial properties to Blackstone or Wells Fargo (WFC, Financial).
The divestiture of the financial subsidiary will also reduce risks while reducing the supervision of the Federal Reserve. The transaction does not include the Senior Secured Loan Program, as this is a business that it shares with Ares Management.
“This announcement is the next step in GE’s transformation to a more focused industrial company,” Chief Executive Officer Keith Sherin said in a statement. “The sale of Sponsor Finance aligns with our strategy to pair a smaller GE Capital with GE’s long-term industrial growth.”
From the statement, it is clear that the company will emphasize more in manufacturing. General Electric has several key drivers that make the company able to generate good returns in many other markets.
Relative Valuation
As of today, the share price is $27.24. General Electric's earnings per share without non-recurring items for the trailing twelve months ended in March were $0.08. Therefore, the P/E (NRI) ratio for today is 340.50.
To use another metric, its price-to-book ratio of 2.53x indicates a premium versus the industry average of 1.80x, while the price-to-sales ratio of 1.90x is above the industry average of 1.01x. These metrics indicate that the stock is relatively overvalued.
Final Comment
Despite the high relative valuation, I would recommend fundamental investors to consider this stock for their long-term portfolios. The stock has surged almost 8% in a year-to-date basis, compared with a 1% gain for the Standard & Poor’s 500 Index (SPY, Financial). Hedge fund gurus like Steven Romick (Trades, Portfolio), David Dreman (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Robert Olstein (Trades, Portfolio), John Buckingham (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Richard Snow (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Bill Frels (Trades, Portfolio) and John Keeley (Trades, Portfolio) have added the stock in the first quarter to their portfolios, as well as First Pacific Advisors (Trades, Portfolio), NWQ Managers (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
