General Electric Makes Thomas the Tank Engine a Reality

For more than a year of web ads and TV spots, General Electric (GE) has been rebranding itself with a new slogan: "The digital company. That's also an industrial company."

The message should not be lost on investors. GE's cloud-based Predix operating system is enabling more and more machines to "talk to each other" in order to optimize efficiency in industries ranging from wind farms to jet engines and sub-sea drilling equipment.

And with GE's most recent deal with Europe's largest rail operator, Deutsche Bahn Cargo, it appears locomotives operating on Predix will increasingly be able to "self-analyze, self-diagnose and communicate" with distant headquarters.

In other words, Thomas the Tank Engine is no longer a fiction in CEO Jeffrey Immelt's mind, and that could translate into an earnings surprise for investors. (GE shares are held in Jim Cramer's Action Alerts PLUS charitable trust.)

"We're growing the new parts of our business in the high double digits here," Seth Bodnar, chief digital officer for GE Transportation, said in a phone interview with Real Money. "On the orders front we're growing significantly, and that's in a really challenging rail market."

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GE Transportation, which accounted for more than 5% of the company's $117.4 billion total sales last year, is growing quickly thanks to the "rapid acceptance of digitization to improve both transit and freight rail productivity," William Blair analyst Nick Heymann said in a recent report.

"We're aiming to continue to grow our orders significantly, not only here in the United States, but internationally," Bodnar noted, expecting "high double digits every year." 

GE Transportation is also expected to generate 10% of its total sales just from data analytics and software sales, which is more than any of GE's businesses, largely because the rail businesses are so capital intensive and stand to gain most from GE's RailConnect 360 system, powered by Predix.

This puts GE on track to save the global rail industry about $6 billion annually, Heymann said in a phone interview, adding the Deutsche Bahn deal marks the "first step toward self-aware locomotives."

At the September InnoTrans 2016 conference in Berlin, GE also unveiled a collaboration with Chicago-based Amsted Rail that will introduce a Car Integrity Monitor further extending remote monitoring capabilities to rail cars using machine sensors. Much of GE Transportation's latest developments are based on Intel's (INTC) processing technology, and Predix partners also include Action Alerts PLUS holding Cisco (CSCO) , as well as wireless giants including Verizon (VZ)  , AT&T (T) , Vodafone (VOD) , and Sprint's (S)  parent Softbank.

Overall, GE Transportation says it has improved railcar fuel efficiency by about 10% to 15% via Predix, operating efficiency by 30%, and locomotives ability to haul by roughly 50%.

"We're looking at the whole globe," Bodnar said, citing interest in Latin America as well as Europe for orders, licensing and "game-sharing" deals in which GE takes a portion of the savings booked by its partners.

Editor's Note: This article was originally published on Real Money at 12:30 p.m. on Oct. 7.

Employees of TheStreet are restricted from owning individual securities.

Action Alerts PLUS, which Jim Cramer co-manages as a charitable trust, is long GE and CSCO.

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