General Electric - Alstom May Turn Out To Be A Growth Catalyst

May.15.14 | About: General Electric (GE)

Summary

GE placed a $13.5 billion bid to acquire Alstom’s Power Segment and Grid Segment.

Alstom’s acquisition would not only enhance the company’s production capacity but the merger would also give GE a strong foothold in the European region.

GE’s Wind Turbine business has shown 290% YoY growth in wind turbine supply orders.

The company is contracting the operations of the Energy Management unit which showed dismal performance over the recently ended quarter.

General Electric Company (NYSE:GE) is a well-diversified global organization that manufactures and markets industrial, technological, and financial products and services. The products and services of the company range from aircraft engines, power generation, water processing, and household appliances to medical imaging, business and consumer financing, and industrial products. The following discussion will focus on the tactics employed by the company to strengthen and grow its top line in the future.

Revenue Distribution

Approximately 70% of the top line is generated through the industrial operations of the company while the remaining 30% of revenues are attributable to the GE Capital segment. Over the recently ended quarter the company experienced a positive performance in its Industrial segment while a negative performance was experienced by the GE Capital segment. As discussed in my previous report GE is making continuous efforts to divest its Capital segment wherein it would let go of its real estate business and stakes in international banks. The intention behind this divestment is to strengthen the aggregate profit margins of the company. A byproduct of the divestment is that additional capital would be provided for investment in profitable ventures.

Geographically, the company is spread across various parts of the world, wherein the US is the largest contributor to the top line of the company. The following chart clearly shows the division of revenues in terms of geography.

Source: Annual Report, 2013

GE-Alstom Debate

Recently, GE placed a $13.5 billion bid to acquire Alstom SA's (OTCPK:ALSMY) Power and Grid segments. GE believes that it could create synergies through this acquisition since the two segments go hand in hand with GE's Power and Water segment. Its top and bottom lines indicated double digit growth over the recently ended quarter.

The French company interests Siemens (SI) as well however for entirely different reasons. Where GE seeks to create synergies, Siemens wants to block GE's way to the European region. Siemens is presently a leading party on the European end but is obviously sensing a threat with the GE-Alstom merger following which it placed a rival bid on Alstom. The competition improved Alstom's stance to demand a higher price from GE; the French government for one particularly wants GE to improve its offer on creating and ensuring job security. Alstom's BOD has already given a clear indication that the company is more interested to do business with GE as opposed to Siemens. The French government, however, seemed at odds owing to the high unemployment rate that the French economy is grappling with. GE's offer holds more weight due to the wide scale synergies that may be created with the merger whereas Siemens is actually in a lose-lose position. It seems highly likely that Alstom would be acquired by GE though the discussions may be dragged on for some time.

The acquisition would benefit GE from various angles. It would not only enhance the company's production capacity but the merger would also give GE a strong foothold in the European region. GE's Industrial businesses presently account for 70% of its total revenues; with the addition of Alstom the Industrial business' contribution would increase to 75% of the top line. Furthermore, GE would extract cost synergies from the segment. According to one estimate, $1.2 billion in cost synergies would be created over the five years following the deal which would have a positive impact on the overall profit margins and EPS of the company. However, these potential cost synergies are exactly what worry the French government. The French economy is rather socialist in nature and wants assurance regarding the job safety of its people. I am confident that the deal will go through but perhaps a few clauses will have to be tweaked for the deal to reach successful completion.

Increasing Backlog Orders

GE's Wind Turbine business has shown an excellent YoY performance. The company recently reported that it has received 3900MW of wind turbine supply orders in the US since January 2013 compared to 1000MW of wind turbine orders in May 2012. Translating into a growth percentage the orders grew by a whopping 290%. Up until now, the company managed to install 1100MW of the said orders while the remaining orders are to be commissioned or begin construction by the end of 2015. The company maintains a strong position and is on a continuous growth path.

Dispelling Unprofitable Businesses

Furthermore, the company is dispelling its less profitable businesses. In addition to GE Capital the company is divesting its fuel dispenser business which is a part of the Energy Management unit of the company. The Energy Management unit weighed heavily upon the overall profitability of the industrial segment. The unit's bottom line dropped by a steep 67% YoY while revenue generation remained weak as well.

Concluding Remarks

The company is strengthening its core operations while divesting its less or unprofitable businesses. GE is further extending to other markets to bolster its industrial segment growth. With the top and bottom lines expected to grow GE continues to maintain a good repute with its investors. Annual dividends paid by the company have increased at a CAGR of 20% since 2009 while the company continues to make methodical share repurchases to ensure distribution of profits among the shareholders.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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