General Electric's Comeback Story Continues

Wall Street went wild for General Electric (NYSE: GE  ) this week, bidding shares up by more than 3% when the megacap announced the return of a dividend revenue stream from GE Capital Wednesday, and helping to (briefly) suspend the decline of the Dow Jones Industrial Average.

Why was this a big deal? As you'll recall, the U.S. economy hit a bit of a speed bump back in 2008 and 2009, and GE's financing unit was right smack-dab in the middle of it. Billions of dollars' worth of soured mortgage loans sapped the subsidiary's finances, and with its balance sheet in shreds, GE Capital was forced to halt the transfer of funds (in the form of dividends) to its parent company, while it got its own house in order.

Over the ensuing years, GE worked to do just that. It whittled down its balance sheet, de-emphasizing volatile financial investments and placing more emphasis on industrial operations. Today, a slimmer, more efficient GE Capital boasts a 10.4% tier-one capital ratio and just finished reporting stable year-over-year profits despite reducing revenue inflow by 12%.

Within the unit, "green shoots" are emerging, and like delicate spring flowers, GE Capital is cautiously beginning to pluck a few out and send them home to Mama. After making an initial special dividend delivery of $4.5 billion to the mothership this year, GE Capital will follow up with quarterly payments of $475 million. That's only about 30% of 2012 earnings, versus the company's pre-crisis habit of paying anywhere from 50% to 90% of its profits as dividends to GE proper.

Plant a seed and watch it grow
And what does General Electric plan to do with its subsidiary's cash, once it gets its hands on it? That's the bigger story.

Part and parcel of GE's downsizing of the finance unit, remember, was its return to its industrial roots. Back in 2010, GE CEO Jeff Immelt told investors this effort will involve some $30 billion in spending over a two-to-three-year timespan, as the company retools some existing manufacturing units, expands others, and swallows new subsidiaries whole. The company blew through a big chunk of this change early on, buying multiple companies in the oil and gas industry, including, notably, John Wood Group's well-support division in 2011, which GE beat out Halliburton (NYSE: HAL  ) to win.

Then ... silence. No major acquisitions for months. GE broke that silence this week, however, when it announced a pair of purchases in the mining industry: Australian mining equipment-maker Industrea for around $700 million, and also privately held Fairchild International for an undisclosed amount.

Valuation matters
These purchases make sense within the context of GE's decision to double down on its heavy industrial businesses in general, and its move into the energy industry in particular. But do they make sense from a value perspective?

Analysts are characterizing the buys as a move by GE to capitalize on natural resources demand from China -- a big destination for Australian coal and iron exports. Revenues at Australian miner BHP Billiton (NYSE: BHP  ) were up 10% last quarter, while rival Rio Tinto (NYSE: RIO  ) , also a big player in Australia, grew 3%.

This Chinese demand is fueling sales growth at Industrea, which counts both BHP and Rio among its customers, and where sales to the mining industry have more than doubled over the past three years. That's obviously attractive to GE, where companywide revenues declined 8% last quarter (although remember that much of this decline came from the intentional retrenchment at GE Capital).

So while critics of the deal (and there do appear to be some, given that GE's shares have fallen back a bit since the GE Capital dividend announcement came out) might argue that GE overpaid in paying two times sales for Industrea, I'd argue that the valuation really isn't that bad. GE costs 1.4 times sales itself, and for now at least, Industrea is growing a lot faster than GE proper. Assuming similar growth and similar valuation for Fairchild (unconfirmed, as GE has not disclosed the purchase price, and Fairchild's financials are not public), the deals look good to me.

So, too, does GE stock. Sure, other Fools will tell you there are better, more focused bargains in the energy industry -- such as the "three stocks for $100 oil" that we recently profiled in this free report. But at 15.7 times earnings, 12.7% long-term earnings growth, and with a 3.6% dividend kicker, GE looks more than fairly priced today. As dividends from GE Capital begin to filter through and boost the dividends that GE pays its own shareholders, the stock will look even more attractive in the years to come.

That's my opinion. That's why I've publicly recommended the stock on Motley Fool CAPS, and that's why I'm sticking with my "outperform" call on GE today.

Editor's note: A previous version of this article incorrectly stated that GE purchased the John Wood Group in 2010. In fact, GE purchased John Wood Group's well-support division in 2011. The Fool regrets the error.

Fool contributor Rich Smith holds no position in any company mentioned. Check out his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Halliburton. The Motley Fool has a disclosure policy.

We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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