Why General Electric Company Wants to Switch Off These Lights

General Electric Company is on a mission to boost both asset and shareholder returns.

Jul 21, 2014 at 12:45PM

Images

General Electric appliance image by rafael-castillo Creative Commons license.

So far In 2014, General Electric Company (NYSE:GE) has taken two highly publicized and visible steps toward its goal of increasing industrial earnings to 75% of the company's total profits: the spin-off of its consumer retail finance division via the upcoming Synchrony IPO, and the purchase of French industrial giant Alstom's energy business. Yet a smaller, future transaction may demonstrate more tangibly why the company is revising its business divisions so thoroughly.

Last Friday GE confirmed that it is indeed exploring options for a sale or spin-off of its Louisville-based appliances and lighting division. Creating a joint-venture with another appliances manufacturer is a third option that the company hasn't ruled out. 

The iconic appliances division is not an insignificant contributor to GE's top line: with $8.3 billion in annual sales, it comprises 5.6% of total company revenue and 8% of industrial segments' revenue. 

Yet the division has struggled during and since the recession, with sales growing at a compounded annual growth rate, or CAGR, of only 1.6% since 2009. And at $381 in segment profit last year, earnings are still below 2009's mark of $360 million.

With such performance, the appliances division is far removed from the revenue and earnings model GE is building. To understand where the company's new industrial benchmarks are forming, we can look at a snapshot derived from the company's second quarter 2014 earnings released this past week. Below are the company's four largest industrial segments:

SegmentRevenueOperating Profit%
Power & Water $6,292 $1,133 18.01%
Oil & Gas $4,761 $665 13.97%
Aviation  $6,090 $1,197 19.66%
Health Care $4,483 $730 16.28%
Total $21,626 $3,725 17.22%
Average $5,407 $931 16.98%

Source: SEC filings. All dollar figures in millions. 

Together, these four segments accounted for 63% of the company's earnings last quarter. We can observe that these segments are quite large: the smallest, health care, garnered $4.5 billion in revenue last quarter. Each segment also throws off robust profits: as a group, these segments averaged 17% of operating profit (before accounting for any corporate items and/or eliminations).

These four lines of business give us a pretty clear idea of where the future of GE lies. It's in powerful industrial revenue streams with enough profit (mid-to-high teens) to allow significant share repurchases and funding of the company's handsome 3.3% dividend, while still providing for investment in acquisitions and capital equipment. 

The revenue and returns for "GE Appliances and Lighting" fall well short of this model. While as mentioned above, the segment's quarterly revenue, at $2.1 billion, can't be considered insignificant, this figure doesn't hit even 50% of the next largest segment, health care. The appliances and lighting segment returned only $102 million, or less than 5% operating profit, last quarter. Because the segment is asset-based, with appliance inventory contained within GE's larger consolidated balance sheet, Appliances and Lighting also presumably drags on the company's overall return on assets, or ROA, a measure of how effectively a corporation uses its assets.

Parting with the appliances segment is consonant with what's turning out to be a divest-and-replace strategy for GE. That is, the company is selling off assets with lower returns (such as appliances and the consumer credit portion of GE Capital) and replacing them with higher return businesses -- hence the Alstom deal.

A critical evaluation of Appliances and Lighting also recognizes the reality of GE's size. At $146 billion in consolidated revenues, it's a progressively harder task for any one segment to move the revenue and earnings needles at General Electric. Even should GE invest another $1 billion in Appliances and Lighting as it has done since the recession, it's doubtful that the segment would see enough progress on either a top-line or margin basis to reach the performance of GE's four model segments over the long-term.

When a crisp financial decision has spiritual implications

Images

Image: General Electric Company

Of all the reconfiguring GE has done and has yet to do, divesting itself of Appliances and Lighting will be the clearest and most tangible break with the company's past. Though founded in 1892, GE likes to trace its heritage back a few years earlier, to 1878, when Thomas Edison formed the Edison Electric Light company. The creation of the incandescent bulb was not only a milestone in American industrial history, it was also the genesis of General Electric's brand ubiquity. I grew up with GE appliances in my home and I know that more than a few readers did as well. Should GE sell its appliances and lighting division outright, it will lose a tangible connection with American consumers and truly hasten its destiny toward becoming a primarily industrial company.

Retaining the GE appliance branding through a spin-off or joint venture might be a better decision for this reason. Rather than join the ranks of admired but somewhat abstract companies in the minds of the average consumer (think ABB, Siemens, or Emerson Electric) via a sale, perhaps GE, continuing its consummate deal-making so far this year, can find a way to achieve its sharp financial goals, while keeping its spiritual connection to Thomas Edison, and its household name status, intact. 

Leaked: Apple's next smart device (warning, it may shock you)
GE is not the only company looking to spark its revenue streams. Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. One small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Asit Sharma has no position in any stocks mentioned. The Motley Fool owns shares of 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers