By Ted Mann
With a pledge to divest its mammoth banking operation over the
next two years, General Electric Co. has made the move investors
have long wanted, and staked its future on jet engines, power
turbines and oil services instead of finance.
Now comes yet another hard part: proving that its industrial
portfolio can reliably grow.
"The future for GE is as an industrial company," Chief Executive
Jeff Immelt said this past Friday, announcing that the company will
sell off virtually all of its GE Capital lending arm, retaining
only those finance units that it uses to bolster its power
generation, health-care and aviation businesses.
The divestitures over the next two years will mean giving up the
sources of a third of the company's profit. GE will lessen the blow
to its per-share earnings by buying back $50 billion in stock, a
move that will help reduce the conglomerate's outstanding share
count by 15% to 20% from 2014 through 2018.
Mr. Immelt also said the company will continue to look for $3
billion to $5 billion a year in acquisitions to bolster its
industrial side.
The exit from finance is the boldest portfolio move in Mr.
Immelt's nearly 14 years at the top, a stark change that
acknowledged there would be no way to break GE out of its prolonged
share-price slump without letting go of financial services.
But it will leave him on the hook to deliver sales and profit
growth at a time when the power-generation business remains under
pressure and the collapse in oil prices threatens operations
accounting for a fifth or more of the company's industrial
sales.
Friday's share price surge for GE--an 11% single-day increase,
its largest since 2009--indicates investors are hopeful, said Deane
Dray, an analyst at RBC Capital Markets who has long covered the
company.
"It's not just the exit from Capital, but also a more focused
industrial, and that's what people have been asking for the whole
time," Mr. Dray said in an interview.
The next read on those businesses will come on Friday, when GE
reports its financial results for the first three months of the
year.
Mr. Immelt spent $14 billion acquiring oil and gas companies
over the first half of the decade, and GE had been counting on that
business as a driver of growth right up until the collapse of crude
oil prices last fall. The price collapse has led oil producers to
slash their equipment budgets, and GE has said it expects a decline
in both sales and profit of up to 5% over the course of 2015.
Observers now think that estimate is "woefully understated," Mr.
Dray said. His team estimates GE's oil and gas earnings could fall
23% this year. GE has previously projected confidence that it can
ride out a dip in the oil business that executives see as a
cyclical problem, not an existential one.
The results will include a $16 billion charge representing the
bulk of GE's cost for spinning off lending, Jeffrey Bornstein, the
company's chief financial officer, said this past Friday.
GE has told investors it should be able to maintain double-digit
industrial earnings growth through 2018. Mr. Immelt said Friday
that the decision to pull the trigger on selling out of financial
services was made possible in part by moves that left the
industrial side of the business more robust.
The company has invested significantly in its jet-engine
business, which is beginning to ramp up manufacturing of its newest
engine design. And it has been jettisoning other lines of business
that don't yield high returns, such as its appliance unit, a
mainstay of the company that GE agreed to sell to Electrolux AB for
$3.3 billion last year.
The company is also working to complete its $17 billion
acquisition of Alstom SA's power business, a deal that would be
GE's largest-ever acquisition and one GE has said will give it a
broad base of installed power turbines that will spin off years of
profit from lucrative maintenance and overhauls.
It is that mix of business that investors want to stake their
bets on, according to Mr. Dray and other analysts: high-tech
equipment that is hard for competitors to match, delivered on long
cycles that provide great predictability about future sales, with
the opportunity to reap service revenues for decades to come.
Industrial growth has been up. GE reported growth in industrial
sales of 6% in 2014, up from 1% the year before.
One risk for GE is actually getting the Alstom deal closed.
European regulators have entered a second-phase review of the
acquisition, looking to ensure that GE's purchase of a main rival
doesn't squeeze out competition in the market for power-generation
equipment. GE now expects to close the deal in the third quarter of
this year, later than originally planned.
Other things that could go wrong include a deeper or
longer-than-expected downturn in the oil industry, or a recession
that holds down sales of GE's power turbines and health-care
imaging machines, forcing the company to look outside for
growth.
Now that GE has pared down its operations to create a more
focused industrial portfolio, Mr. Dray said, "you have to have
things go right."
Write to Ted Mann at ted.mann@wsj.com
Access Investor Kit for Alstom SA
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=FR0010220475
Access Investor Kit for General Electric Co.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US3696041033
Subscribe to WSJ: http://online.wsj.com?mod=djnwires