When he was head of
General Electric (NYSE:
, Jack Welch had one rule for his company: Be the top player in the
field, or don't even bother. The numbers backed him up. Business
school professors repeatedly teach that an industry leader can have
up to twice thenet profit margins of the second-leading player
(which in turn has twice theprofit margins of the third-leading
So whenever GE enters into a new niche, it likes to make a rapid
push to establish industry leadership.
That's why mining-equipment firms are buzzing right now. GE has
stated plans to become a $5 billion player in the industry within a
few years. A few acquisitions in the space -- including a May $466
million purchase of Australia's Industrea Ltd. and an August deal
for Fairchild International for an undisclosed sum -- have already
gotten GE to a $2 billion run rate in the mining-equipment
But there's no way GE can go from $2 billion to $5 billion in
just a few years through good old-fashioned organic growth. In
fact, the company readily concedes that it will need to make more
deals to hit its ambitious target.
This should come as welcome news to investors who are already
eyeing the mining sector.
The move comes at a curious time. Leading mining equipment
players such as
are already warning of a slowdown
. Why would GE want to invest in an industry that might be
It's because the company thinks long-term and is well aware of
the fact that many large mines around the world have already given
up their most accessible bounty, so future mining efforts will have
to dig deeper to get at the good stuff. That's why GE wants to
become a leading player in the niche of helping miners work more
efficiently, in ever-more challenging environments.
So which company is GE targeting in order to become a key player
in this space? Well, industry rumors have been focused on
Joy Global (NYSE:
, which may seem like a bargain for GE after its stock has slid
from $96 in early 2012 to a recent $54. Indeed, on a fundamental
basis, this is likely a solid entry point, as Joy Global'searnings
per share power could exceed $10 by mid-decade thanks to a series
of recent acquisitions. It's the near-term mining industry
pressures that keep investors from taking that long view.
But here's the real reason the rumors of a GE/Joy Global are
likely incorrect. Joy Global is simply too big. The company's
currentmarket value is $5.8 billion, and GE would likely need
tooffer $8 billion or more to snap up the company. GE rarely makes
a deal of that size, and has instead been hinting at smaller
Instead, three other companies do look like a nice fit for GE.
And while you shouldn't buy a stock solely based on takeover
rumors, any deal that transpires would make an investment in any of
these stocks just that much sweeter...
1. Generac Holdings (Nasdaq:
Mining industry watchers may be overlooking this choice because
it's not really a mining play. Instead, Generac has made clear
inroads into the consumer and industrial spaces with its wide range
of generators and back-up power plants. Yet as GE notes, the
nextwave of investments for mining firms is for equipment that
helps them work more efficiently in remote locations.
Climbing deeper into mines, or venturing farther away from key
power grid sources, makes the supply of steady power more
challenging. Generac's gear is perfectly suited to this task and
nicely complements GE's other offerings in this sphere. GE could
likely acquire this company for less than $2.5 billion (implying a
solid 50% premium for Generac's shareholders) and add $1 billion in
sales to the GE mining division -- before GE uses its sales network
to boost Generac's revenue streams even higher.
2. Actuant (NYSE:
This is another company that isn't involved in mining per se, but
is perfectly suited for the industry. Actuant makes a wide range of
products used in complex construction environments, such as
hydraulic lifts, machining equipment, electrical products and power
transmission. GE continues to stress a goal of helping miners work
in more complex environments, and Actuant has 100 years of
experience in helping customers do just that.
The current $2.15 billion market value implies GE could have
this business for less than $3 billion and layer in Actuant's
current $1.6 billion run rate into its own mining division.
3. Columbus McKinnon (Nasdaq:
This company's product line consists of hoists, jibs, cranes,
shackles, winches and many more goods that are used to establish
platforms in unstable environments. Although ship building,
logging and transportation have been its core markets, it's
starting to build a presence in mining as well. The current $300
million current market value would make this an especially
digestibleacquisition for GE.
Risks to Consider:
Stocks should never be bought solely on the basis of a
possiblebuyout , and should pass muster from a research
perspective, so use these ideas as a starting point for further
Action to Take -->
It seems to be an almost foregone conclusion that GE will
make major moves to bulk up its mining division. The company is
looking at this space as it is moving out of favor, which is quite
savvy. This could help set a floor for all mining-equipment stocks,
which have been falling lately due to cautious industry forecasts.
Finding good companies that are still poised for far-higher
earnings when the cycle peaks is always a wise move, so it would be
smart to follow GE's lead.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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