Just How Important Is GE Capital?

GE Capital, once famous as GE's money machine, has been in focus recently. Regulators want to rein in the business. There are talks of GE spinning off the business eventually. At a simplistic level, extending capital to customers is a sureshot way to win business, when one is dealing in heavy equipment, long execution cycles and very large ticket deals. That is why GE Capital has been the important winning leg of GE's business (the others being superior technology, great execution and of course aggressive marketing prowess).

But from a business portfolio point of view, how does GE Capital stack up? Look at the adjoining chart (from Gridstone Research) showing segment-wise operating profit. GE Capital's operating profit (a.k.a. its net earnings, which are interest and other income less interest expense) had crashed from the levels of $3 billion plus per quarter seen in fiscal 2007 to less than $600 million in the latest June ending quarter. Is it because of the recession? The other businesses' profit numbers don't indicate as such.

The operating margin percent chart (from Gridstone Research) shows the consistent performance of GE's Energy and Technology businesses - margins have been steady in the 17-20% range through all the last seven quarters. The outlook of both these businesses is also strong, with GE talking of the potential market in "400 global stimulus projects in areas where there are appropriations for nearly $200 billion. While we have only realized limited revenue to date, we believe that activity will increase in the second half of 2009."

Cut back to GE Capital, and what a contrast. This business has withering margins (down to 5% from a vaunted 18%), a shrinking balance sheet and much lower leverage. Scaling down GE Capital has had virtually no negative impact on the Energy & Technology businesses - the latter two together still generate $3-3.5 billion operating income per quarter, which is not worse off than what they achieved a year ago.

Disclosure: no positions

Comments

[update:]

GE is a vile company. They came up with designed obsolesence in the old days so their products would intentionally break down after just a few years. It is easy to make light bulbs that last FOREVER but that would not be a scam now would it?

Jack Welch led the cause for the disposable worker, age discrimination and the crooked earnings report, balanced to the penny every single quarter. For which they will pay an SEC slap on the wrist fine.

They use NBC as a liberal propoganda machine.

They survived in disgrace due to multiple government bailouts, most of which were hidden from the GE controlled media and done behind the scenes with free loans. Of course we saw the biggest part of the taxpayer rip off in broad daylight with the infamous bank holding company snowjob.

So now this dog that sucks off the government largesse will inflict upon us the BIGGEST SCAM OF ALL TIME, the Green scam with voodoo Tax and Cap and imaginary alternative energy, all funded by the TAXPAYER (government socialists).

Yeah GE is green, look what a bang up job they did polluting the Hudson River. Another slap on the wrist.

Aug 11 01:34 PM

[desicon:]

GE capital business is more than extending capital for its equipments. I particularly do not have a problem GE being in the financing business. I specifically have a problem with the incompetent CEO. As a conglomerate the management ought to have recognized the exposure due to over reliance on profitability from one division. They have masked the inefficiencies in other businesses by projecting the unsustainable profitability. I still do not believe the GE management has recognized the problem. Now they are using NBC to curry favors with the Obama administration so that they can keep their position.

GE future is now tied to the hip with the Obama administration not based on management, business strategy or product innovation.

Aug 11 03:09 PM

[danS:]

It's silly to analyze GE Capitals profitability without removing the effect of bad loans on their bottom line. It is my understanding that GE Capital would be nearly as profitable as it was a few years ago if it was not for the write down of bad loans. When GE is able to put the write downs behind them they will return to their earlier earnings of $2 per share, pay $1 per share annually in dividends, and will easily trade in the 25 -35 dollars per share range

Aug 11 10:54 PM

[R. Anderson:]

Wow, what a couple nutcases. Everything is a conspiracy to a angry conservative.

Aug 11 11:03 PM

[Emerald:]

Let's look at history and the facts. Jack Welch financed GE with commercial paper until Bill Gross at PIMCO called him on it. Imagine financing a comglomerate with mostly short term paper. Vervy risky, but Jack was called a hero. He turned GE into a shadow bank by financing its own receivables (ok, but risky) and getting into real estate lending and far flung businesses far from the manufacturing end. This is another major risk as senior management no longer has a core competency and history shows that most disparate businesses under a corporate umbrella eventually fail. It's ok to change a company focus, but dangerous to stay in way too many unreated businesses.

As long as Jeff Emmelt continues the conglomerate model, not much will change in the slow growth economy ahead of us. Running "green" ads distracts the investor from what is really going on inside the company. Are they an infrastructure company or is it entertainment or finance? All of the above? The stock is not that attractive now that we have had a three month bounce and it's direction is unclear given management's comments.

Aug 12 10:42 AM

[Barbara Durkin:]

GE and Windron:

Barron’s
May 16, 2005
Thomas Donolon

‘Edison’s Legacy Has No Place for Wind Power’

“…It is shameful that GE, a highly profitable company, has decided to take advantage of faulty federal and state wind energy policies by producing turbines for “wind farms.”

“In addition to environmental damage…, wind power has an economic flaw that any GE engineer ought to be able to imagine: Since no human power can turn the wind on and off when it’s wanted for electricity, every bit of wind power capacity must be backed up by another generating source…Immelt, an engineer, understands this but he provided the executive’s counter argument:” “The customers want it, so it’s GE’s job to produce it.”

Wall Street Journal moderated debate.

“Benjamin W. Heineman, Jr., has served as a senior vice president, general counsel and secretary of GE since 1997″:

“Mr. Heineman writes:”

“Fred, when Jeff Immelt announced this initiative he made absolutely clear it was about business and increasing profits. Our short form summary was, as I mentioned a moment ago, “green is green.”

“The whole initiative is market driven. We are not asking for government regulation. We believe our customers want this technology.”

cei.org/pdf/5081.pdf

blogs.chron.com/lorens...

Paul J. Gaynor Executive Summary Career Highlights Education Paul J. Gaynor is responsible for the strategic direction and day-to-day .... After beginning his energy career with GE Capital, he joined Enron in London ...
maine.gov/doc/lurc/rev... - Similar

UPC First Wind President
Michael Alvarez
Section 4 Technical Capacity
Michael Alvarez is responsible for First Wind operations and asset ... After beginning his energy career with GE Capital, he joined Enron in London in
maine.gov/dep/blwq/doc...

www.masshightech.com/s...

UPC First Wind
Steve Vavrik
Vice President,
Origination
“After beginning his energy career with GE Capital, he joined Enron in London in a project development and gas trading capacity. His role at Enron included trading natural gas forward contracts and negotiating structured power deals.”
www.maine.gov/dep/blwq...

The Chairman of First Wind is Jim Moog.
www.firstwind.com/abou...

Jim Mogg is also Advisor to the Chairman of Duke Energy. Crescent Resources, Duke Energy’s land management and real estate business, also reports to Mogg.

He was named president and chief executive officer of Duke Energy Field Services (DEFS) in December 1994, and chairman, president and chief executive officer for DEFS in December 1999. Mogg was named group vice president and chief development officer on Jan. 1, 2004. He was named advisor to the chairman in April 2006.

ewiqa.duke-energy.com/.../

In 1999, the United States Environmental Protection Agency commenced an enforcement action against Duke Energy for failure to comply with the Clean Air Act. Duke asserted that EPA regulations under the law were arbitrarily changed over the course of 25 years. Environmental groups assert that Duke is using loopholes in the law to increase emissions. Initially, Duke prevailed at the trial court level, but in 2006 the case was argued before the Supreme Court (Environmental Defense v. Duke Energy Corp. (05-848). The Court unanimously ruled on April 2, 2007 against Duke Energy in favor of the environmental groups.[7]

In 2002, researchers at the University of Massachusetts Amherst have identified Duke Energy as the 46th-largest corporate producer of air pollution in the United States, with roughly 36 million pounds of toxic chemicals released annually into the air.[8] Major pollutants indicated by the study include sulfuric and hydrochloric acid, chromium compounds, and hydrogen fluoride.[9] In 2008 Duke Energy rose to the 13th position in the list, more than doubling its release of toxic chemicals to 80 million pounds per year.[10]
en.wikipedia.org/wiki/..."

Hypothetical future value accounting practices, and the creation of shell corporations for debt shuffling purposes, are the hallmarks of Enron, Halliburton and Ponzi schemes...

"Green is green"

Barbara Durkin

Aug 18 09:47 AM