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Summary

  • Alstom acquisition will allow the company to increase its footprint in the power segment.
  • The Alstom acquisition and the sale of fuel dispenser unit is in line with the strategy of growing the industrial segment and getting rid of the segments performing poorly.
  • The Alstom acquisition will be accretive to the company and it will add to the profit margins.

General Electric (NYSE:GE) has taken another step to enhance its future growth from the core operations. In our past articles, we have discussed the growth prospects for GE in aviation and power generation based on its growing order backlog and possible growth of the industry. In this article, we will focus on two recent moves by the company, which will help the company grow in the long term and also improve its profit margins in the short term. GE seems to be shifting its focus from the lesser growing energy management segment and concentrating its resources to Power and Water segment. It has recently placed a bid to buy the energy wing of the French energy and transportation giant, Alstom. We believe that this acquisition would allow GE to better capitalize on the opportunities existing in the power industry.

What Alstom would bring?

Alstom has its own troubles for selling its key segments of the company. However, it does not mean that the business does not have the potential to grow. GE is acquiring two segment of the company: Alstom Power and Alstom Grid. Both these businesses would go directly under GE's Power and Water segment. This particular segment has shown encouraging results in the first quarter of the current year. The operating profit margin of the segment has improved by 120 basis points to 16.1%. However, the revenue growth has slowed down mainly due to maturing demand of Wind power. In the first quarter, the revenue growth of Power and Water segment from equipment was negative 3% while from services, it grew robustly by 23%.

The acquisition of Alstom will add to the market share as well as the production capacity of the company. The power segment of Alstom has a product mix of steam turbines, Wind turbines, boilers, gas turbines, generators and air quality control systems and monitoring with the related products. Alstom has the biggest capacity of steam turbines and coal-fired boilers. According to Barclays research, it is ranked first in hydropower and third in gas.

In addition, Alstom Grid will add a few more products to GE's current portfolio including ultra-high-voltage electricity transmission and transformers. Alstom also has a leading position in High Voltage direct current. These products will further complement the expansion of the company in Power sector. As the deal goes through, Alstom will at least be doubling the Power and Water unit of GE. This unit will further grow as the company's increased product mix complements each other in this sector and it enjoys the power of greatest market share.

Cutting Back on Energy Management Segment

General Electric is looking to sell its fuel dispenser unit, which is called, Wanye, to First Reserve Corp. This unit comes under Energy Management wing of the company, which has both poor revenue growth and profit margins. The deal is expected to be in the range of $500-600 million.

In the first quarter of 2014, the Energy Management wing of GE showed a 6% decrease in revenues and 67% decrease in profits. This was due to decreasing operating profit margin of the segment. Currently, this segment offers only 0.3% operating profit margin. This segment might work if the revenues were increasing which is not the case here. Falling revenues and operating profit margin would take this particular segment into losses. The sale of the unit should have a positive impact on the balance sheet as well as the profitability of the company as it was a money losing unit.

Conclusion

The acquisition of Alstom and the sale of the fuel dispenser unit further clarify the strategy of the company. The management is taking the company back to its roots - as I mentioned in my previous article about the IPO of the credit unit, the dependence on GE Capital is decreasing and GE mainly be operating in the industrial segment with credit operations that support the industrial operations. The above mentioned deals will allow the company to increase its footprint in the power segment and enhance the balance sheet as well as profit margins. I believe the strategy followed by the company is wise and we will see considerable growth for GE over the next 2-3 years.

Source: General Electric: Another Step In The Right Direction?