GE and Best Buy Face Challenges, Opportunities

General Electric (GE) and Best Buy (BBY) were both viewed as the apple of investors’ eyes until the last few years. GE had a rock solid reputation for producing steady profits and dividends that were almost too good to believe, in the Bernard Madoff sense. Of course it’s unfair to call GE a Ponzi scheme, but the consistency of the company’s performance should have caused concern. At the opposite end of the spectrum, Best Buy grew like a rocket along with the housing and CD music booms.

Now GE’s appliance and lighting businesses have weakened with the housing bust, and financial services has become addicted to government guarantees to sell debt. The Wall Street Journal’s “Unable to Unload Limping Divisions, GE Invests in Propping Them Up” reports that GE has to renew investments to protect the survival of these consumer businesses it could not sell.

The Journal is also reporting in “GE Capital's Political Minefield” that GE is in a political fight to maintain control of its financial arm without it being declared a bank holding company. If GE’s financial business is large enough to be considered a systemic risk, it would be classified as Tier 1 and have to be spun-off. GE is trying to maintain the status quo while its earnings and assets are deteriorating.

Best Buy excelled moving upscale with ever more costly large screen TVs and complete home theater systems. Yet they did not intimidate shoppers looking for less expensive products. Now that the housing bust is dampening consumers’ appetite for new appliances, price drops are squelching margins on all home entertainment electronics and the CD music is waning.

Fear not, Best Buy is ready to breakout in a new direction. Innovative companies always have a way to apply their resources in new directions. The Wall Street Journal’s “Best Buy to Sell Green Vehicles” reports that the store has begun selling electric scooters, bicycles and even Segways in 19 California, Oregon and Washington locations.

The $11,995 Brammo Enertia electric motorcycle will be coming to Best Buy soon. This is a clear reminder of when the company created an ecosystem around the high cost flat panel HDTVs. Best Buy is preparing to just replace one electronic revenue driver with another. Electronic transports are now clean enough and cool enough for general retail. Wal-Mart (WMT) and Target (TGT) will be next.

Both GE and Best Buy converge in their belief in the future mass appeal of electric transport. GE made its offense move by investing $70M in battery manufacturer A123Systems. This evolving emphasis on light transport has a profound effect on General Motors and the other manufacturers of heavy vehicles. It says that America will never go back to buying 10M+ traditional automobiles again.

The implications are profound for not only the automobile manufacturers, but also their dealer distribution network. General retailers will start cannibalizing the light end and the volume at the heavy end will not be enough to support even the current round of dealership trimming. I can visualize most families only owning one traditional vehicle and multiple small light electric powered 2 and 4 wheel transporters.

In a world of little barriers to entry for light vehicle assemblers and marketers, the value adding component manufacturers and general retailers are advantaged over traditional automobile manufacturers and dealerships. GE and Best Buy are well positioned for this new world.

While Tesla is expanding from an all electric $100K roadster to a $50K sedan, the real winner amongst the traditional motorcycle and automobile manufacturers should be Honda (HMC). Honda already knows the value of keeping excess weight off its cars.

Disclosure: Author is long GE.

Comments

[Road Runner:]

I agree with you about GE and Best Buy. They have good management that is always looking to move their companies in a new direction if needed. Good management is something average investors often overlook, but it is key for a company.

GE launched their green focus a few years ago. I believe they will succeed at it once they get past their financial division problems. That is why I am an investor in GE. I like many of their green products like very high efficiency jet engines, wind turbines, Sodium batteries, investment in A123 for next generation Li-ion batteries, etc. They seem to be going to technologies that have high potential but are also “green”.

The main difference between Best Buy and Circuit City was management - Best Buy had good management and Circuit City had bad management. That was the difference that caused Best Buy to crush Circuit City, and drive Circuit City into bankruptcy. Meanwhile Best Buy was teaming with Geek Squad to improve customer service, while still keeping their prices down.

I’m not an investor in Best Buy because my focus is usually on technology – my undergrad is electrical engineering so I usually stick to technology companies where I can fully understand the product and market.

Jul 08 02:21 PM

[LPC:]

In my opinion both Best Buy and GE do not have good management at the top. Generally you can purchase most big ticket items that Best Buy sells a lot cheaper on Amazon.Com. As for GE, their CEO has no creditability. Keeping the status quo is not a good strategy for either company.

Jul 08 07:54 PM

[Ted Hurlbut:]

Best Buy continues to innovate in offering customers an outstanding experience. They certainly haven't sat on their hands since CC went out.

Jul 08 09:59 PM

[3treesout:]

Scooters might be great for the western and southern states but the densley populated midwest and eastern states can not be counted on for any kind of large buying support.

GE is a watch situation. Their GE capital is their achilles heel and they look to be strugling with this part of their business for some time.

Jul 09 02:49 PM