General Electric (NYSE:GE) is the largest conglomerate in the world, and currently the company has exposure to a number of sectors. A degree of diversification in operations can provide substantial security against the business risks. However, conglomerates sometimes fall victim to their own strategy - focusing on too many sectors and not mastering a specific segment can leave the company exposed to substantial business risk. It can be extremely difficult to carry out the strategies with perfection, which might result in less than impressive performance of the segment.
However, an efficient execution of the strategy can result in decreasing the overall risk exposure and enhancing the earnings. General Electric is currently focused on venturing into the high-growth segments, and Energy sector seems to be at the forefront of the growth. At the same time, the aviation segment is also showing signs of promise along with the healthcare segment. The new target structure is clearly less exposed to the financial sector.
Key Global Investments
GE's investments in diversified technology and industry are spread across the globe. Specifically, GE's investment in China and Japan are intriguing. There are differing views about the company's investment in China; as the growth in China is maturing, many believe that it is the end the Chinese growth story. On the other hand, GE management seems content with a growth rate of about 7%. I must say, I am leaning a little towards the view point of GE management as 7% is still a very healthy growth rate in the current global economic conditions. China will remain an important component of the global economy despite a slowdown in the economic growth, and a strong presence in the Chinese market will put GE in a very solid position. Furthermore, GE's stake in China is based on infrastructure, which is key for further growth.
An upswing in economic growth is the ideal scenario and that's where the company should focus its future investments as the demand for infrastructure tends to improve in times of economic recovery. Such a scenario is expected in Japan as indicated by the boost in the country's equity index. A substantial improvement is likely in the economy of Japan and the nature of GE's business can play a critical role in supporting that uplift in the form of healthcare, energy and aviation products.
John Rice, Vice Chairman of GE, stated in an interview with Bloomberg that the company is looking to benefit from the situation by expanding partnerships in the country. One concern that has been identified by analysts is that yen has had a sizable weakening. I find that as the company's investments are diversified across the globe, and as most of these investments last for a very long period of time, the fluctuations in exchange rates are not of key concern to GE.
Healthcare: The Source of Future Growth
The healthcare segment has a very firm standing and it appears to be the strongest source of future growth for the company. Firstly, GE has improved its stake in the healthcare segment in recent years due to the growth potential of the industry. The acquisition of Clarient and SeqWright are clear examples of the company's stance towards healthcare. The segment posted revenues of $4.3 billion in the first quarter of 2013 showing an increase of 2% in the segment's profits. Recently, GE has launched its sequencing assay, which is a marked improvement in the healthcare technology. It helps in finding out the response of patients to different therapies; thereby assisting the process of diagnosis.
Progress of Oil and Gas Segment
As I mentioned above, the focus seems to be on the oil and gas sector due to the immense growth potential. According to Deloitte's 2013 outlook on Oil and Gas, the development of unconventional reserves such as shale gas and tight oil have been the major headlines for the industry. Since 2009, Oil and Gas has been the fastest growing segment for GE with respect to sales. Furthermore, acquiring companies with major synergies, such as the oil machinery producers, appears to be a very thoughtful strategy on the part of the management of the company as it also improves the efficiency of the company. The acquisition of Lufkin (NASDAQ:LUFK) industries serves as a decent example as the company paid a substantial premium for it. This will support the company's interest in unconventional oil and gas products.
A very important point which needs to be reiterated is that the company's strategy is very well thought out. They are dealing with the GE Capital issue, which appears to be on its way to full recovery within the next two years. The investments are diversified across the globe and the horizon of investments is long enough to nullify some short-term risks like foreign exchange volatility. Similarly, emerging markets along with developed ones are being tapped into, demonstrating a promising outlook for future growth. Lastly, the restructuring of business segments is aimed at growing segments of the company. This strategy in specific is likely to improve the growth of GE as it simultaneously reduces its financial risks associated with one specific segment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.