GE Can't Shed Those Unwanted Pounds

There was a time not so long ago when it appeared that General Electric (NYSE: GE  ) was an undervalued conglomerate composed of numerous strong parts. But almost by the day it's become more likely that the company may be little more than a hodgepodge of ill-fitting businesses -- many of which it can't unload -- that are headed collectively for goodness-knows-where.

Let's look at some numbers:

Market Value

$177.5 billion

Forward P/E, 2009

10.0

Revenue (ttm)

$185.1 billion

Operating Margin (ttm)

14.2%

Return on Equity (ttm)

18.7%

Total Cash & Short Term Investments (mrq)

$3.8 billion

Total Debt (mrq)

$548.7 billion

Dividend Yield

7.00%

Decline from 52-Week High

(56.7%)

Source: Capital IQ, a division of Standard & Poor's. ttm = trailing 12 months, mrq = most recent quarter. As of Oct. 24, 2008.

As you probably know, the big company is neatly divided into four major sectors:

  • GE Capital is the financial arm.
  • Energy Infrastructure produces all manner of quality oilfield equipment, under such respected names as VetcoGray and Hydril, and in competition with the likes of National Oilwell Varco (NYSE: NOV  ) and Dresser-Rand (NYSE: DRC  ) .
  • Technology Infrastructure produces a host of health-care, transportation, and other technologically sophisticated products.
  • NBC Universal operates the broadcast networks and other related units.

A backlog bulge
That's all fine, and as CEO Jeffrey Immelt told us when he announced the company's third-quarter results not long ago, GE's backlog has grown by $20 billion in the past year, to $170 billion. But at the same time, in an era when conglomerates have generally been proven to be an inefficient and outmoded form of corporate organization, it appears that the current credit crunch is making it harder for Mr. Immelt and his minions in their apparent efforts to streamline the company.

The latest batch of earnings demonstrates GE's uneven performance. The energy group expanded its earnings contributions by 31%. But the financial unit, the biggest member of the foursome, saw its income slide by 33%.

As I told my Foolish friends at the time, should I find myself wandering around in Mr. Immelt's moccasins -- and given the financially precarious world we now inhabit -- I'd figure out a way to jettison the entire financial arm at warp speed, rather than run the risk of having its problems metastasize to the other units through restricted credit ratings and related inabilities to service customers across the board.

The lingering capital unit
Oh, sure, in September, the company announced that it would trim a portion of the finance unit. But it's difficult to imagine any sort of fit within the company for whatever parts of GE Capital might remain. On Friday, Mr. Immelt expressed a desire to continue making loans to restaurant franchises and companies involved in bankruptcies, although even loans in those areas would be trimmed, he indicated. For my money, a company making magnetic resonance imaging equipment doesn't also need to be lending money to burger joints or pasta palaces. Why not leave the latter type of business to JPMorgan Chase (NYSE: JPM  ) or Bank of America (NYSE: BAC  ) ?

There also are other structural surgeries being performed -- or at least attempted -- within the company. For instance, in July GE announced plans to spin off or sell its $12.7 billion consumer and industrial businesses. That would have severed its ties to its historic, if slow-moving, appliance, lighting, and electrical lines.

Stuck with the lights on
But not so long ago, with the credit market steadily constricting, management admitted that it'll be tough to accomplish the separation of the unit, which saw its earnings whacked by 82% in the past quarter. Similarly, GE is still stuck with the $30 billion private-label credit card operation it's been trying to sell since earlier this year, and prospects for finding a buyer amid the current malaise don't appear encouraging.

And then there are the rail cars. GE had been in talks with GATX (NYSE: GMT  ) about selling its rail-car leasing business -- something that doesn’t really fit with either MRI equipment or burgers. We're talking hundreds of thousands of choo-choo cars here. But talks between the two companies recently fell apart over price. So GE's choice appears to be between heading down a different track with its trains, or continuing to lease the cars on its own.

Could there be a surprise waiting?
Admittedly, things don't appear to be entirely negative at GE. There's the big backlog mentioned above, and the company recently (and somewhat surprisingly) raised $15 billion in capital, including a $3 billion stake from Warren Buffett. So Mr. Immelt and his new Berkshire Hathaway (NYSE: BRK-A  ) sidekick just might have something up their sleeves. My personal hope is that, should the company concentrate on a new direction, it'll involve energy and/or technology.

But with GE's shares having shed 5% on Friday, they're now sitting at half their year-ago levels. It just might be that more than a few investors are taking my approach: I'd like to see some streamlining and restructuring steps actually occur -- rather than simply come up for discussion -- before I'll become a buyer of the company's shares.  

Nearly 10,250 Motley Fool CAPS players have rated GE a four-star company. Does that include your vote?

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Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned. He does welcome your questions or comments. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 27, 2008, at 7:09 PM, JBK96 wrote:

    I believe this analysis/commentary is shallow in substance:

    - GE Capital's loan portfolio is of much higher quality than the vast majority of banks. GE has a consistent record of tight risk management controls. There are some problems, however much less than the market. GE Capital did make $2bn last quarter.

    - Because of above, GE Capital is well positioned to take advantage of finance market opprortunities - much quicker than the competition can step back in.

    - From what I hear, many industrial/infrastructure divisions have substantial backlog (and growing recently). This will help to insulate the -- temporary -- slowdown of earnings contributions from GE Capital until market conditions suggest GE ramp up origination in the finance areas (of course, net-net, earnings will be down).

    - I prefer to look at what a finance division in a company made during the good times and how much it lost of this profitability in the slower times. Unlike most financial institutions, GE Capital appears to be experiencing slower earninge rather than losses. Again, all of the above comments.

    Finally, we all know the highly levered hedge funds are being forced to sell large stock positions to meet margin calls. As a mega stock, I believe it is reasonable to suspect these funds hold a great deal of GE shares. Hence, a big downward pressure on shares for a reason outside of the company's fundamentals.

    During this crises, I have found the quality of finance articles from many sources just plain stink. Forbes and this web site win the prize.

  • Report this Comment On October 28, 2008, at 12:34 AM, ecuagrino wrote:

    Interesting article. Something not mentioned, the value of the businesses GE wants to keep.

    The rode a major wave a few years back with Plastics, tomorrow it will ride a few other waves... healthcare, infrastructure, energy & entertainment.

    Healthcare - GE is working on coming up with machines that work on early detection. As our nation attempts to deal with rising healthcare costs, businesses in early detection & prevention will win.

    Energy - GE has invested in wind, nuclear, oil/gas and power generation. It will win as countries focus on revamping or building their energy infrastructure. A growing population needs energy.

    Infrastructure/Transportation - As China/India of the world grow, they need transportation/infrastructure, GE stands to gain. Aircraft engines, locomotives, power plants, etc.

    Entertainment - GE has invested growing entertainment such as the US Hispanic market. It has faired well with the Olympics and will continue to do so with future deals.

    Yes, GE may have trouble shedding some of it's pounds. Luckily, it is now in a position where it doesn't need to have a firesell to raise cash. GE can now wait out the market and sell later.

    Short term, the company is strong. Long term the company will come out even stronger.

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