- GE wins several large orders for its wind turbines and jet engines.
- These industrial segments have been leading the way for growth.
- The company has a long-term goal of becoming a predominantly industrial company.
- GE’s Alstom acquisition and Synchrony Financial IPO are key moves towards this goal.
General Electric (NYSE:GE) remains one of my top picks among the large cap industrial focused sector. The stock has a lot going for it for investors, with its 3.3% dividend yield and double-digit dividend growth rate. In addition, General Electric's moves such as downsizing GE Capital and buying of France's Alstom (OTCPK:ALSMY) are largely underappreciated by the market, leading to its relative undervaluation compared to peers.
General Electric secures several major orders
Over the past few weeks General Electric has won several major orders for its industrial goods.
American Airlines engine order
On July 2, Reuters reported that American Airlines (NASDAQ:AAL) was close to completing an order for 200 CFM International engines. Do note that CFM International is a joint venture between General Electric and Safran (OTC:SAFRF).
These engines would be used to equip 100 Airbus A320neo jets that the company has on order. At a list price of $13 million each, these engines represent a potential order of $2.6 billion, the largest ever for the post merger American Airlines.
For General Electric, this order adds to its already massive order backlog at its Aviation division. As of the end of Q1 2014, the backlog stood at $126 billion, representing more than 50% of all the backlogs for the company.
Brazil wind-turbine order
On June 30, Bloomberg reported General Electric was close to selling wind turbines to Brazilian developer Casa dos Ventos in deal worth as much as 1.33 billion reais ($604 million).
In the two part deal, Casa dos Ventos was buying 230 megawatts of turbines for 805 million reais. This was necessitated due to a previous developer (Enercon GmbH) being unable to fulfill its contract, according to sources.
Within two weeks Casa dos Ventos will decide if it wants to buy a further 150 megawatts of turbines for 525 million reais. This part of the deal hinges on whether or not General Electric can guarantee delivery by 2015.
Due to laws requiring the use locally made parts to qualify for the cheap loans, manufacturers have struggled to meet demand. Brazil has a long-term target for wind power to account for 9.5% of its installed capacity by 2022.
These turbines would be manufactured at General Electric's Brazilian wind turbine factory. By the end of 2014, the company will have installed 900 turbines in Brazil, making it the number one supplier in the country with a 24% market share, according to Bloomberg New Energy Finance.
General Electric to build deep-water blowout preventers for Maersk
On June 24, Fuelfix reported that Danish rig contractor Maersk Drilling was turning to General Electric to build a new class of deep-water blowout preventers. Financial terms and other details were not discussed in the report. This project can be seen as another coup for General Electric oil and gas segment, which has seen growth jumpstart after its 2013 purchase of Lufkin.
Engineers at General Electric's oil and gas division will design, test and build the new BOPs and risers at its technology center in Houston. Described as "new generation", these preventers are designed to handle record reservoir pressures of up to 20,000 PSI and temperatures up to 350 degrees Fahrenheit.
As part of its "Project 20K", Maersk and BP (NYSE:BP) are jointly working together on a new class of drilling rigs and other offshore technology. The firms are focusing much more on safety, redesigning systems with an eye towards never repeating a disaster like the 2010 Macondo oil spill in the Gulf of Mexico.
These orders reaffirm General Electric's industrial segment growth. In addition, they may also allow for future follow-up long-term service contracts, a high margin area which the company has been focusing recently.
General Electric's move to being mostly industrial focused is almost complete
General Electric is often still perceived as a "slow" growth company by the market. I think this perception is outdated. The simple fact is that six out of seven of General Electric's business segments posted double-digit "organic" earnings growth in the second half of 2013.
Where the market and I agree on is that General Electric needs to divest GE Capital ASAP. However, as I noted in a recent article, the company is moving fast towards completing this mission, selling off its Nordic segment and fast-tracking the Synchrony Financial IPO (NYSE:SYF).
General Electric's CEO Jeffrey Immelt has repeatedly stated that the company aims for its industrial segments to generate 60% of its total profits in 2014. By 2015, this figure should improve to about 70%.
Lastly, General Electric purchase of Alstom Energy assets is major move towards its goal of becoming predominantly industrial focused. These assets are a good fit as they complement the existing turbine business and add exposure to western Europe, an area where General Electric has been largely absent from.
General Electric may not be the sexiest stock out there. However, in terms of risk/reward, you are well compensated due the large dividend yield and future growth.
Furthermore, General Electric has an upside catalyst coming via the Synchrony Financial IPO. The paperwork has been already filed and analysts estimate an IPO for sometime in Q4 2014. Given the troubles seen in that unit, such as illegal credit card practices, its divestiture cannot come soon enough.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.
Disclosure: The author is long GE. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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