NEW YORK (TheStreet) – General Electric's (GE) CEO Jeff Immelt has promised to get the company back to its industrial roots. So it comes as no shock that company announced plans to sell its GE Appliance unit, one of its poorest-performing segments.
Shares of GE were trading at around $26, dow 7.6% on the year to date, trailing the 0.47% gain posted by the Dow Jones Industrial Average.
GE's appliance unit has a suitor, drawing interest from Quirky Inc. and Sweden-based Electrolux AB (ELUXY). The questions is how much GE can fetch for its century-old businessh.
Calls and emails to GE representatives were not immediately returned.
The appliance unit wasn't picking up its weight. Revenue continues stagnate. This business accounts for almost 6% of the company's total revenue, but generates roughly 1.6% of total profit. Not to mention, with less than 4% in operating margin, GE was wasting money just by "keeping the lights on." Cutting its losses seems like a logical move.
Nonetheless, it is estimated that GE could generate in the area of $2 billion. It's not game-changing deal for GE, which is generating almost $30 billion in operating cash flow. Still, that's pretty good coin for a business that's producing no growth while delivering poor margins.
The way I see it, GE is positioning itself for the next 10 years of growth. So at around $25 per share, the stock is a sure bet to reach $35 in the next 12 to 18 months. Note, GE would only need to grow its revenue at a long-term rate of 4% to 5%.
What's more, with Alstom now firmly in hand, selling the appliance unit will help GE regain the focus it needs to grow its international presence against German rival Siemens AG (SI). This is because GE now owns all of Alstom’s global gas and steam turbine equipment and services business.
Combined, these businesses, which have a large customer base in Europe, generated more than $10 billion in annual revenue. The appliance business would have only gotten in the way by wasting resources.
Assuming GE can achieve that growth rate, combine with the synergies from Alstom, Immelt should return GE's free cash flow back to the low teens. And when you factor the untapped growth in European markets, GE stock still has a shot to reach $40 by 2016.
All told, the General Electric value story has only just begun. With the stock still down more than 37% from its 2007 high of $41, there won't be a better chance to buy.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates GENERAL ELECTRIC CO as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate GENERAL ELECTRIC CO (GE) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, increase in net income, expanding profit margins and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- GE's revenue growth has slightly outpaced the industry average of 1.1%. Since the same quarter one year prior, revenues slightly increased by 2.7%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- GENERAL ELECTRIC CO has improved earnings per share by 12.9% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, GENERAL ELECTRIC CO increased its bottom line by earning $1.47 versus $1.38 in the prior year. This year, the market expects an improvement in earnings ($1.67 versus $1.47).
- The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Industrial Conglomerates industry average. The net income increased by 13.2% when compared to the same quarter one year prior, going from $3,133.00 million to $3,545.00 million.
- 49.83% is the gross profit margin for GENERAL ELECTRIC CO which we consider to be strong. Regardless of GE's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 9.87% trails the industry average.
- In its most recent trading session, GE has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
- You can view the full analysis from the report here: GE Ratings Report