Seeking Alpha
Long only, deep value, growth at reasonable price, carmakers
Profile| Send Message|
( followers)  

General Electric (NYSE:GE) spent most of 2013 restructuring some of its businesses and the company has a lot of action items for 2014 and beyond. The company expects to sell its North American retail finance business and use the proceeds to fund a massive buyback in order to reduce its share count to 9-9.5 billion by 2015. As the company continues to grow and return cash to its shareholders, 2014 might be the year of General Electric.

After the sale, GE Capital will make up about 30% of the company whereas 70% of the company will consist of designing, producing and marketing of high-tech industrial products. Selling the retail finance arm of the company will shrink its overall size somewhat, but it will allow the company to buy shares back, which will eventually make each share more valuable. This will also allow GE to focus on what it does best and improve its profitability rather than extend the company's reach to multiple disciplines.

Because of GE's high credit rating, GE Capital is able to get access to cheap loans and it can extend these loans to those that are in need of credit. GE Capital sends its profits directly to GE, and this supports the company's dividends as well as its share buyback plans. This is why GE will not be getting rid of its finance arm completely.

GE is also working hard on cutting redundancies and reducing its costs. The company hopes to reduce its SG&A spending to 12% of its industrial revenues by 2016. The company continues to invest in higher margin projects and it is increasing its production efficiencies in order to reach its margin goals in the medium to long term. Last quarter, the company's margins grew by 120 basis points and this trend is likely to continue as we move forward.

Moving forward, some of the most important industries for GE will continue to be the aviation, energy and healthcare industries. This is where GE makes most of its money and this is where most of the growth will come from in the near and far future. Compared to last year, GE's services segment saw double-digit revenue increases in aviation, oil, gas, energy management and transportation industries. Of the nine regions GE operates, it saw double-digit growth in six regions.

GE's Power and Water segment saw 19% growth in the last quarter and it will continue to see double digit growth for the foreseeable future as the demand for energy and water keeps increasing globally. In this particular business segment, the product mix is growing favorably so that the company is selling more of its higher margin items (products and services) and less of its lower margin items. The company's aviation spare parts business grew by 25% and it is seeing a lot of strong demand.

GE's aviation business continues to grow solidly. In 2010, this business segment generated $17.6 billion in revenues and $3.3 billion in profits. As of the first three quarters of the year, it generated $15.7 billion in revenues and $3.1 billion in profits. By the end of the year, GE's aviation segment will pass $20 billion in revenues and $4 billion in profits. The business segment was able to increase its deliveries from 2,783 to 3,296 between 2010 and 2012 and it increased the installed base from 55,000 to 58,000 during the same period. The biggest revenue generators for this business segment are commercial engines, commercial engine services, military engines and services, BGA and integrated systems and avionics and digital solutions. Each of these businesses generates between $1.0 billion and $6.9 billion in annual revenues and this will continue to increase in double digits.

GE's healthcare business is another segment to pay attention to. GE's healthcare segment generates about $20 billion in annual revenues and employs 53,000 people. About 70% of the revenues come from healthcare systems such as CT, DGS and MI. About 20% of the revenues come from life sciences which includes items like cell technologies research, consumables, genomics and bioprocess. Finally, 10% of the revenues come from healthcare related IT products and services. In 2009, GE healthcare generated 80% of its revenues in developed markets and 20% in emerging markets; whereas in 2012, roughly 74% of the revenues came from developed markets and 26% came from emerging markets. In the future, emerging markets are likely to fuel growth for the company. As people are more aware of their bodies, the number of screenings continues to increase, which should help with GE's healthcare business growth. GE's cancer screening tools are being used by more people each year, and these tools are getting more efficient over time.

GE's healthcare business continues to develop portable devices, such as a pocket sized ultrasound machine. This allows for poorer parts of the world to have access to these tools since they might not be able to afford the big machines and all the costly servicing that comes with these machines.

As of last quarter, GE had a backlog of $229 billion, up from $223 billion in the previous quarter. The company's equipment and services both see strong demand and it is unable to keep up with the demand at the moment, which is a nice problem to have. In the first three quarters of 2013, GE returned $13.9 billion to investors in the shape of dividends and buybacks. The company is scheduled to return about $18 billion by the end of this year, and do even better in 2014, particularly in terms of buybacks.

GE is expected to earn $1.63 per share this year, followed by $1.75 in 2014 and $1.86 in 2015. Given that the company will continue to reduce its share count with its strong cash flow, we can expect the company's P/E to fall to low teens by 2015. Since the company continues to grow in double-digits in many segments and geographical regions, I don't see why it should be anywhere near expensive. If the company can execute on its plans and continue to return cash to its investors, 2014 can easily be the year of GE.

Source: Will 2014 Be The Year Of General Electric?