Is General Electric Company About to Make Its Biggest Mistake Ever?

GE's Appliances division is up for sale, but maybe what we should really be selling is General Electric stock.

Jul 19, 2014 at 12:01PM

Rhetorical question time: Just how dumb is General Electric Company (NYSE:GE)?

In 2010, GE decided to shrink its GE Capital division... while simultaneously shelling out $1.6 billion to buy a credit card portfolio from Citigroup (NYSE:C) -- a schizophrenic business plan if ever I heard one.

Two years later, GE was back in the markets, spending hundreds of millions of dollars more on a foray into the mining business -- just as demand for raw materials was crashing in China. That was certainly bad timing.

But hold onto your hats, folks. Because GE is about to make its biggest mistake ever.

Pressroom
General Electric is selling its appliances division -- and investors could get soaked for the loss. Source: General Electric.

Goodbye, GE appliances (we hardly knew ye)
Here's the story in a nutshell. Back in 2008, as the American economy was crashing, General Electric hit upon the bright idea of trying to sell off its Appliances division for the princely sum of $8 billion. After two years of searching, unsuccessfully, for a buyer willing to pay that price, GE threw in the towel in 2010. Reversing course of its divestiture plans, GE CEO Jeffrey Immelt promised instead to hire 500 new workers and invest $432 million into improving operations at GE Appliances. (GE later upped that investment to a cool $1 billion.) 

Now, it seems GE has decided to reverse course once again. As reported in The Wall Street Journal Thursday, GE is putting its Appliances division back on the block, asking anywhere from $2 billion-$2.5 billion for the unit. Foreign corporate shoppers are the most likely buyers in a deal, with the Journal saying China's Haier and Mexico's Controladora Mabe SA are two likely suspects.

It's an announcement to which GE shareholders can only respond with stunned silence.

A loss of staggering proportions
$2 billion for GE Appliances? I mean, I get that Appliances isn't the best business at GE. Revenues at the unit are down 18% from 2008. Appliances' operating profit margin, at just 4.5%, is less than half the profit margin for GE as a whole.

But even so, a $2 billion price tag on Appliances works out to only about 0.25 times this unit's annual sales, and a mere fraction of the 1.8 times sales valuation on the rest of General Electric stock. It's 25% of what GE thought the business was worth six years ago, and just $1 billion more than what GE sank into reviving the Appliances business less than four years ago!

Indeed, viewed even in the most favorable light, this seems a destruction of shareholder value of staggering proportions.

GE math
Consider: Let's assume GE mispriced Appliances when it tried to sell it six years ago (a safe assumption, since it didn't sell). So, let's say the Appliances business was worth not $8 billion back then, but rather just half that -- $4 billion. Add the $1 billion spent spiffing up the business, and divide the resulting $5 billion value into the best-case price GE is expected to get for the unit today: $2.5 billion.

That works out to a 50% loss for GE shareholders.

Foolish takeaway
If you were wondering why GE shares have underperformed the rest of the S&P 500 over the past year, and gained only 12% and change -- now you know why. GE is quite simply a poorly run company today, making bad decisions right and left. With a P/E ratio in the double digits, but a projected growth rate only in the single digits, General Electric stock is a dog with fleas.

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Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup and General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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