I don't think there is a more determined company on the market today than General Electric (NYSE:GE). If there is, I feel confident in saying that the management team of that company is not nearly as misunderstood as those who are leading GE - particularly CEO Jeff Immelt. Although I don't own GE stock, I have to applaud the way Immelt is executing GE's visions. This, despite the harsh and mostly unnecessary criticism he has taken.
A lot has been made about General Electric's recent deal for struggling French company Alstom (OTCPK:ALSMY), which Alstom's board recently accepted after GE was "asked" to sweeten the deal. Although rival Siemens (SI) has expressed interest, we recently realized that Siemens' attempt to block GE's bid was more of ploy by the French government to get Immelt to pony up more cash.
The only thing Siemens achieved in its block attempt, aside from reducing GE's cash hoard by roughly $4 billion, is that Siemens (for the time being) showed some courage. And it was a message to its own shareholders that it plans to remain competitive. For GE, while some may complain about the valuation of this deal and whether Immelt thought this through, I can tell you that Alstom was worth every penny.
All told, this is GE's biggest acquisition - albeit more than it wanted to spend. Note, GE has $57 billion in overseas cash - more than enough to finance this deal. And that cash never would have reached this level if not for Immelt's direction. And following this deal, GE's direction has become a hotly-debated topic. I can tell you where the company is going next.
But before we look forward, let's take a look back and understand that GE had telegraphed several of its maneuvers. Investors just weren't paying attention. Recall, last year, there were several points during GE's operation that I couldn't recognize where this company was going.
Note, aside from weak margins and perpetual disappointments in the Industrial business, the company was dealing with the overhang of the poor-performing GE Capital business. But despite all of this, GE was still making money. And it wasn't until management made its next direction clear, which included returning GE to its industrial roots, that these shares, which are up close to 30% in 12 months, began to take off.
First, GE got media giant Comcast (NASDAQ:CMCSA) to accelerate the time frame to absorb the rest of NBC Universal. The initial spin-off to Comcast, which took place in 2011, still left GE with a 49% stake in NBC. Recall, the rest of the deal wasn't expected to close for seven years. As it stands, Comcast was interested, and the deal, which left GE with more than $16 billion in cash, closed last year.
It was this deal and the subsequent cash infusion that made the recent Alstom acquisition possible. But before Alstom, don't forget that GE had two other buys, including $3 billion deal for Lufkin Industries, an oilfield and power transmission equipment builder. Lufkin was a profitable business generating more than $1 billion in revenue. Next, GE spent $4.3 billion on Avio, an aerospace-propulsion specialist headquartered in Italy that generated $2.4 billion in revenue.
Both deals were interesting, because they were unlike what GE had done in the past. But GE didn't stop there, a couple of months later, Immelt announced that he was unloading GE's 75% stake in a Thai banking operation. That deal gave GE an additional $5.7 billion in cash.
As it stands, in several decisions GE removed uncertainty about GE Capital, and the company looked more focused. Not to mention, GE has a tighter rein on its industrial operations, while removing more than $20 billion from its net debt load. Say what you want about Immelt, this is where his value is and how he's earning his pay. He has been in battle mode for some time.
In terms of what's next for GE...
That's the big question for investors. But the company has been clear about this - it wants to return value to shareholders. In the process, management has used terms like "re-architecting the backbone of the company." And it looks as if that's what they've been doing since last year, which lead to the deal for Alstom. But investors have to be patient. Deals like these will need time to cultivate the right synergies between the respective operations.
Now, I'm not suggesting there are no execution risks here. But so far, management has shown that they have a great pulse on this company. To that end, I'm not ready to say that GE is done shopping, especially for companies and/or assets that can accelerate management's vision to become both leaner and strengthen GE's industrial capabilities.
I've said this before, however. Investors have to trust that management will use its capital wisely, even if it means weaker near-term profits. The year to focus on is 2015. This is when GE's investments will begin to pay off. This is when the company's gains will likely run ahead of restructuring costs. And until the company shows meaningful signs of slowing down and/or struggles in executions, this stock remains one of the most underrated names on the market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.