Inside the New GE with Bulk of Finance, Real Estate Gone - Analyst Blog

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It seems the sleeping giant has finally woken up and is pushing ahead with its long-planned restructuring initiatives. This will result in a simpler and nimbler company with a re-focus on core operations. The changes at the Fairfield, CT-based General Electric CompanyGE are being orchestrated by Chairman and CEO Jeff Immelt.

Immelt gave a detailed roadmap of his plans to prune the various non-core operations of the company in order to focus more on its industrial businesses. The latest and arguably the most audacious restructuring initiatives are part of a series of strategic actions undertaken by General Electric.

The Strategic Plan

In accordance with Immelt's vision to transform the diversified conglomerate to an industrial-focused firm, General Electric has vouched to divest most of the financial units under GE Capital over the next 24 months. The only financial operations that would be retained by the company will include the financing verticals like GE Capital Aviation Services, Energy Financial Services and Healthcare Equipment Finance. These units directly relate to the core industrial operations of the company and will thus form an integral part of its corporate activities.

The GE Capital businesses that will be retained by the company will account for about $90 billion in ending net investments (ENI), which represent the total capital invested in the financial businesses. This indicates a dramatic improvement for General Electric, which has been actively reducing ENI to mitigate operating risks and shield itself from intense market volatilities that plagued the market during the 2008-09 financial crisis.

The company had successfully reduced ENI from $538 billion in 2008 to $363 billion at the end of 2014. General Electric is expected to further reduce ENI by an additional $75 billion with the complete separation of Synchrony Financial SYF by the end of 2015.

Immelt's current restructuring plan also involves the sale of over 4,400 properties, including warehouses, factories, malls, apartment buildings and other commercial properties of GE Capital Real Estate. The real estate assets accounted for about 7% of the aggregate GE Capital assets worth $499 billion at year-end 2014. The CEO felt that this was perhaps the most opportune time to sell these assets when the market was relatively high.

The decision might also have been triggered by the Federal Reserve's decision to raise interest rates later this year, thereby pushing up the financing costs. The assets were sold to a consortium led by private equity firm Blackstone and Wells Fargo & Company WFC for approximately $26.5 billion.

Industrial Focus

The transaction will realign the corporate strategy of the company to a manufacturing-based entity with emphasis on big-ticket items such as aviation engines, drilling machines, generators, medical equipment and scanners. General Electric spun off its North American consumer lending unit in an initial public offering (IPO) at the end of July last year as the first concrete step to shrink its finance business.

The company is also actively pursuing the sale of GE Money Bank AB (Nordics) consumer finance business to Spain's Banco Santander, S.A. In addition, General Electric is further planning to divest its ownership stake in Polish Bank BPH SA. The company is successfully seeking approvals for closing the acquisition of the Power and Grid business of French conglomerate Alstom. With these restructuring initiatives, General Electric expects operating earnings from the industrial business to aggregate over 90% of its total operating earnings by 2018, up from 58% in 2014.

The company further reiterated that its industrial businesses remain on track to report solid operating earnings of $1.10-$1.20 per share in 2015. This is regardless of the fact that General Electric will record $16 billion of after-tax charges in the first quarter of 2015 in connection with the plan, $12 billion of which are non cash. The company expects that the adverse impact of the divestments would be nullified by share buybacks over the exit period.

Management has authorized a new share repurchase program worth $50 billion to execute this strategy, reducing its outstanding share count to 8-8.5 billion by 2018. About $35 billion will be made available through dividend payments of GE Capital to its parent company. General Electric is likely to return over $90 billion to shareholders through dividends and share buybacks through 2018.

Moving Forward

The restructuring actions announced by Immelt have propelled the share prices by 10.9% to close at $28.51 as on Apr 10, 2015. These have brought the average share-price return over the last one-year period to 12.1% compared to 15.8% for the benchmark S&P 500 index.

Excluding the effect of the announcement, the average share price return was a mere 0.6% compared to 14.1% for the benchmark index as on Apr 9, 2015. This proves that the share prices of General Electric had been sluggish in recent times despite an ongoing restructuring process and required a much-needed shot in the arm to pull up the sagging prices.

Investors had long been expecting such radical moves by the company. We expect the shares of this Zacks Rank #4 (Sell) stock to continue the growth momentum in the near future as well. Another notable company in the industry worth mentioning includes Compass Diversified Holdings CODI , carrying a Zacks Rank #2 (Buy).

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SYNCHRONY FIN (SYF): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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