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

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.

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.

You can't afford to miss this
"Made in China" has become an all too familiar phrase, and if GE sells its Appliances unit to Haier, it'll become even more familiar. But fear not: There's a radical new technology out there, one that's already being employed by the U.S. Air Force, BMW and even Nike. Respected publications like The Economist have compared this disruptive invention to the steam engine and the printing press; Business Insider calls it "the next trillion-dollar industry." Watch The Motley Fool's shocking video presentation to learn about the next great wave of technological innovation, one that will bring an end to "Made in China" for good. Click here!

Read/Post Comments (6) | Recommend This Article (19)

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 July 19, 2014, at 12:42 PM, kdt34wqx wrote:

    It's so true. GE is run for the benefit of its own managers, not its shareholders.

  • Report this Comment On July 19, 2014, at 2:51 PM, kthor wrote:

    GE is boring ... drop it from the DOW30 will ya!

  • Report this Comment On July 19, 2014, at 4:38 PM, yoshii wrote:

    2% of their profit is appliances and lighting. They are in the midst of a radical refocusing of their business to it's industrial core. As is said: "Play to your strengths". They are and it will pay off handsomely over the next decade. Appliances aren't a worthwhile part of their core industrial business as they intend it to become. I agree. I hold some for its steady dividend (since1899) and because I see them doing very well in the "back end" of the nuclear power business. (Yes, I know). It MY take, though and MY cash. Have fun, Fools!

  • Report this Comment On July 19, 2014, at 5:08 PM, alphasize wrote:

    Not sure I understand your point. The appliance business is worth what it is worth. Not sure how selling an unneeded asset for its value points to GE being a badly managed company. Are you claiming that you are better able to value GE appliance business than GE and potential buyers? Or are you claiming that you are better able to value return on investment of the appliance business vs. other current/potential GE activities than GE? Would love to see some proof of either one of those.

  • Report this Comment On July 20, 2014, at 3:33 AM, xahne wrote:

    the appliance venture is small potatoes- however I do agree GE is not well run and has paid too much for many acquisitions.

    the stock splits in the late 90's and 2000 ( 3:1) put over 10 billion shares outstanding.

    when the stock was at $6 GE should have bought up a ton of shares.

    jeff immelt is not a great CEO- but maybe they will ge ton track...but it sure as hell is taking a long time, isn't it?

  • Report this Comment On July 22, 2014, at 9:00 AM, cedric wrote:

    i have replied to many of these blogs, what i cannot understand is you have investors praising immelt because of the profits they have in ge. (when ge crashed to 6$) first ge should never had crashed to 6$ this was due to very poor management.

    these same investors, if that is what you want to call them, fail to mention the following,

    1. ge is still 30% less in share price then in 2009

    2. ge dividend is 30% less then in 2009

    3. in 2009 there was a point that an investor if he or she bought on the day immelt became ceo would have seen their investment down 95%

    4. right now share price is down about 60% since immelt became ceo

    i bought ge at 6$ i knew it could not go lower unless it went bankrupt. i have a nice profit but this is not due to immelt. it is just due to market conditions.

    i would rather have a smaller position in a company that is hitting historic highs like all og ge peers, then a large position in a company struggling to find itself.

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Rich Smith

As a defense writer for The Motley Fool, I focus on defense and aerospace stocks. My job? Every day of the week, I'm monitoring the news, figuring out the winners and losers, and tracking down the promising companies for you to invest in. Follow me on Twitter or Facebook for the most important developments in defense & aerospace, and other great stories.

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