General Electric Unplugs Appliance Unit, Nets Higher Premium

NEW YORK (TheStreet) -- Wall Street was not shocked by General Electric's (GE) decision to sell its appliance unit. For years that segment has suffered from weak margins and stagnated revenue growth.

What was a surprise, however, what that Sweden's Electrolux (ELUXY) agreed to pay $3.3 billion in cash, or what seems like a king's ransom, for a business that was suffering from commodity pricing, among other things. It's a steal of a deal for General Electric.

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So with its stock trading around $26 and down nearly 8% on the year to date, now is the perfect time for investors to buy. These shares are a sure bet to reach $35 in the next 12 to 18 months. General Electric would only need to grow its revenue at a long-term rate of 4% to 5%.

The century-old appliance unit wasn't carrying its weight. Although that segment accounted for roughly 6% of General Electric's revenue, it produced less than 2% of total profits, and revenue was rapidly eroding. With less than 4% in operating margin, cutting its losses is a smart strategy. General Electric believes it can record a gain of 5 cents to 7 cents per share once the deal closes.

For General Electric, which has promised to get back to its industrial roots, unloading appliances on Electrolux allows GE to kill two birds with one stone: CEO Jeff Immelt get an extra $1.3 billion cash infusion while General Electric can now focus its attention on international growth.

Plus, with French company Alstom (ALSMY) now securely in hand, General Electric has all of Alstom’s global gas and steam turbine equipment and services business. These businesses generated more than $10 billion in annual revenue. This moves Immelt's plan forward to have, by 2016, roughly 75% of the company's earnings coming from the industrial segment.

The way I see it, General Electric now has enough firepower to take on German rival Siemens AG (SI) in ways that it could never before. The company has just dealt its way into a new era of growth.

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As a side note, to those who complained GE overspent on Alstom by roughly $2 billion, Immelt just made up for that. With General Electric's 3.50% yield and the company's commitment to return value to shareholders, betting against Immelt doesn't seem smart.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @Richard_WSPB

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, increase in stock price during the past year and expanding profit margins. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated." You can view the full analysis from the report here: GE Ratings Report

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