- Calls for General Electric to shed industrial assets ignores the fact that GE Industrial is expected to grow core earnings 7-8% this year.
- Calls to dismantle the rest of GE Capital ignore its 11.2% Tier 1 Ratio and the fact that it grew 12% last year.
- The risky assets that got GE in trouble back in 2008-2009 will be off the balance sheet after the Synchrony spinoff, and the company does not need additional substantive cuts.
For those of you that follow the "Breaking News" section of Seeking Alpha, you may have caught this item from Barclays analyst Scott Davis that calls for General Electric (NYSE:GE) to shed assets titled "GE May Need Radical Cuts To Boost Its Stock":
- Barclays analyst Scott Davis comes up with a new benchmark for evaluating investor interest in GE: He says 80% of phone calls he received when he began covering GE in 2002 were requests for info about the company, while today the number is barely 5%.
- For the phone to start ringing more often, Davis thinks GE needs to make bolder decisions and move aggressively to trim its portfolio of businesses, suggesting the company get out of banking, appliances, data centers or any other non-core, non-infrastructure based business.
- Interest in other conglomerates also has faded, Davis says, concluding that the model of extreme corporate diversity no longer makes sense for investors who can spread risks around on their own via ETFs or other instruments.
A statement like that ignores just how important the so-called "non-core" aspects of GE's business are to the company's growth.
The appliance division has been growing volumes in such a way that revenues have increased by 5%, and when you compare the appliance division's performance in 2013 to 2012, you will see that the segment recorded 23% profit growth. And it's not like 2012 was a bad year for appliances, either. Appliance profits grew 31% in 2012 compared to 2011. Not only is there sentimental value in maintaining the appliance division, as a symbol of General Electric's profitability over the past century, but it is also a lucrative segment that is rapidly growing profits.
When Scott Davis calls for GE to get out of banking, he is presumably referring to GE Capital. Well, that's a loaded statement. On one hand, GE has already announced that it is going to be getting rid of its private label credit card division (to be dubbed Sychrony Financial) within the next year, as part of the company's already existing plans to shrink the banking operations.
If Davis is referring to the GE Capital that remains and will comprise 30% of General Electric's profits going forward, then he is ignoring the fact that GE's remaining financial operations are quite different than what existed before the financial crisis. GE's Tier 1 Capital Ratio is now 11.2%, as opposed to the 6% that the company had to deal with during the crisis. With the risky home loan portfolios and other commercial real estate divisions already sold off, the remaining GE Capital operations are of a much higher-grade, less cyclical quality. And, of course, it's growing at a tidy rate, as well. Although GE Capital's revenues decreased 3% in 2013 as part of asset shedding, it nevertheless managed to grow earnings 12% in 2013. It's hard to see why GE should sell off in entirety such a high-performing division.
I understand Davis's logic for lauding the company's infrastructure business. The oil & gas division was built from a standing start and ended up becoming a $20 billion operation within 15 years, and the company's current growth in South America is something worth getting excited about. The infrastructure business is responsible for much of the company's current $244 billion backlog, and is the largest non-financial operation experiencing greater than 10% growth on GE's balance sheet. But it was the mixture of industrial assets, including appliances and data that were responsible for inching GE Industrial's profits forward 4-5% during the Great Recession, when GE Capital's plummeting capital ratio threatened to take the firm down. It seems to be a case of recency bias to only look at what has been performing well lately, and then suggest that everything else needs to get siphoned off from the company's operations.
With GE Industrial, I think it's best to apply the "if it's not broke, don't fix it" attitude. The core profits at GE Industrial are set to grow 7-8% this year, with an outside chance that we'll be pleasantly surprised with a higher figure if projects in the $244 billion backlog get tackled. When you look at what's left of GE Capital, you're talking about a well-capitalized, high-quality operation that grew profits 12% last year. There's no need for radical cuts, and the company will do just fine without them. It was low capital ratios and risky financial assets that got this company in trouble, not a diverse mixture of industrial assets growing profits.
Disclosure: I am long GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.