General Electric (GE 1.49%) projects one of its businesses will watch its income be slashed 40% by 2015. Yet it turns out that may be a great thing for investors.
Dramatic change
At a recent presentation the chairman and CEO of GE Capital, Keith Sherin, outlined with greater clarity what the future of the business will be as it continues to evolve following the setbacks that characterized it during the financial crisis. As discussed earlier, a big part of this will be the spin-off of Synchrony Financial, and the consumer finance oriented arm of GE.
Source: Company Investor Relations.
Yet the business still has more to go, as it anticipates in its effort to become "smaller and more focused" it will see its ending net investment to move from $370 billion at the end of 2014 down to $300 billion by 2015. And as shown to the right, that gap is even more striking when you see it stood at a staggering $556 billion in 2008.
However, to me, the fact General Electric reveals its Capital business will see its net income plummet from $8 billion last year to approximately $5 billion next year is encouraging.
Source: Flickr / JefferyTurner.
The reason for optimism
The retail arm of GE Capital which will be turned into Synchrony has been wildly profitable and successful, and when it officially IPO's, I'll likely consider investing in it. But the thing to remember about GE Capital isn't that it's losing this business -- and it'll actually hold onto a major chunk of the shares for quite some time -- but the reality it is seeking to become a more focused operation.
Sherin himself said, "We're going to be a smaller, more focused part but we're a key part of GE company." And where will that focus lie? He continued by adding, "Our focus is where we're advantaged in the marketplace, middle market lending and leasing."
And in those words, investors can take great confidence.
Source: Company Investor Relations.
Sherin went on to highlight how GE Capital isn't simply active in providing financial assistance to firms in the middle-market -- what it defines as companies that bring in $10 million to $1 billion in revenue -- but it's a market leader. As shown in the chart to the right, it is a market leader in a number of select and distinct areas.
The more succinct and dedicated GE Capital will ensure it maintains its leadership in these areas by continuing to have its employees be industry experts in order to provide solutions to clients which in turn allows the clients to "earn more profits," and "be more competitive."
And what will that do to GE Capital? If executed correctly, growing the profits of clients will in turn grow the profits of GE itself.
The bottom line
Diversity is often lauded as the key to success for companies running enormous businesses like GE Capital. Yet Warren Buffett once remarked, "you only have to do a very few things right in your life so long as you don't do too many things wrong."
In the case of GE Capital, this focused approach on the things it does well -- so long as it continues -- is an encouraging development and could mean big things to both it and its investors in the years to come.
