Try this: Spell the word "image" out loud, and then say "lightbulb."
Alas, that staple of elementary-school humor (well, it was at my elementary school, anyway) may not work for much longer. According to an internal email, General Electric (GE -1.75%) is looking for someone to buy its lighting business.
While the recent (and ongoing) leadership changes at GE are the top industry news right now, the sale of the company's lighting unit may have an even bigger effect on the company's performance. Here's why.
GE founder Thomas Edison first patented an incandescent light bulb in 1879. Now the industry has changed, and GE Lighting's performance has suffered. Image source: Getty Images.
How we got here
Outgoing CEO Jeff Immelt made the strategic decision to refocus GE on its industrial roots. That meant getting rid of the side businesses that the company had acquired over the years, including its stake in media company NBC Universal and the bulk of its GE Capital financial services businesses. It also meant selling off one of the company's most iconic but also lowest-margin products: the GE refrigerator (along with the rest of GE Appliances).
So, it comes as no surprise that GE would consider selling its lone remaining primarily consumer-focused unit: lighting. Honestly, I'm surprised it hasn't been put up for sale before now. The writing was on the wall for the unit all the way back in 2015, when GE separated its commercial lighting business into a new division called GE Current, but kept its consumer lighting and connected-home businesses together as GE Lighting.
On Thursday, June 8, an internal email revealed that GE was looking for a buyer for its 125-year-old lightbulb business.
What we know
The internal email that broke the story was first reported by EdisonReport.net and was sent by Bill Lacey, GE Lighting's president and CEO. In the letter, which appears to be the first announcement of the sale to GE Lighting employees, he states that it's still very early in the process, and a lot of details aren't yet clear:
We are early on this journey, and as conversations with prospective buyers progress, the company could consider several strategic options. This could include considering different buyers for different parts of the business.
One thing is clear, though: GE Lighting is definitely up for sale.
With the decision to sell its consumer lighting business, GE is actually playing catch-up with the rest of the industry. GE's German rival Siemens spun off its lighting business (which manufactures Sylvania-brand bulbs) as Osram Licht all the way back in 2013. Last year, Dutch company Royal Philips NV spun off its own lighting business (which manufactures Philips-brand bulbs).
What it means
Lightbulbs simply aren't the profit engines they once were, as GE's 2016 performance reflects.
GE Energy Connections and Lighting comprises not just the consumer-focused GE Lighting and the new commercial/industrial Current division, but also GE Energy Connections, which sells industrial controls and equipment and power grid solutions. It also housed GE Appliances until that was sold in June 2016. While the unit is one of GE's largest by revenue ($15.1 billion in 2016), it only contributes 2% of industrial segment profits: just $300 million in 2016.
That profit margin is by far GE's lowest, at only 2.1%. Even the chronically underperforming oil and gas unit has a 10.6% profit margin, and the powerhouse aviation unit has a 23.3% profit margin. This poor performance isn't really surprising given how little of the unit's revenue comes from services as opposed to equipment sales. Services revenue tends to have much higher margins, and almost every other GE unit derives more revenue from services than GE Energy Connections and Lighting.
Now, because of the way GE reports its segment revenues, it's impossible to tease out exactly how well the unit would have performed without the consumer lighting business (or, for that matter, the few months of GE Appliances revenue before it was sold off). However, GE reported that Energy Connections -- which it will retain -- saw its revenue increase in 2016, thanks in part to increasing demand for grid automation and software. Since unloading its own lighting business, Philips' stock price has jumped 34.2%. GE's has declined 4.7% over the same period.
The bottom line is that this is GE's worst-performing division in terms of profit margins, and unloading the equipment-sales-focused GE Lighting will almost certainly improve overall results.
Investor takeaway
Some investors believe GE should be broken up into its component businesses, while others think the company is stronger as a conglomerate. Incoming CEO John Flannery has -- so far, at least -- kept his views on that subject to himself. However, both types of investors should agree that a weak business with a low profit margin doesn't do anything to help investors, whether it's part of the whole or a stand-alone company.
Although it represents a break from the company's century-plus history of manufacturing lightbulbs, selling the business is the right thing to do, and it will almost certainly help the bottom line.
