General Electric: Saying Goodbye To A Legacy Asset

| About: General Electric (GE)


General Electric is looking to divest its appliance business.

According to Bloomberg, this unit may fetch from $1.5 billion to $2.0 billion.

This transaction may occur in 2015, after closing the Alstom acquisition.

Late last week, The WSJ reported that General Electric (NYSE:GE) was looking to sell its iconic appliances business. According to the reports, General Electric is asking for $1.5 billion to $2.5 billion for the unit. This proposed transaction was being delayed by the company, as it was looking to wrap up its acquisition energy assets from Alstom (OTCPK:ALSMY).

The Appliances segment needed to go ages ago

That General Electric is selling off its appliance business should come as no surprise for investors. The company had already tried to exit that unit back in 2008, hiring Goldman Sachs for a possible spin-off or outright sale. However, General Electric's timing could not have been worse, given the global recession ongoing at the time.

Unlike what has been implied in some reports, the appliances unit is still profitable for General Electric, generating about $100 million in profits as part of the combined "appliances & lighting" segment.

However, as shown above, this unit contributes very little to General Electric's bottom line, posting only 4.8% in operating margins, even after several major investments and cost-cutting cycles.

Indeed, besides the energy management unit, which is a key growth area, the appliances unit has the lowest margins in General Electric's industrial portfolio.

Not only is the appliances unit low-margin, but it is also very low-growth. This unit posted flat revenue and volume growth during Q2 2014. Kitchen appliances have long been a commoditized product, with General Electric struggling to compete with Asian manufacturers.

Other segments, especially aviation, are picking up the slack

In contrast, General Electric's other industrial segments, aviation, oil & gas, power & water, etc., post much higher margins, normally in the 15% to 20% range.

In addition, these segments are posting robust growth. Just this month, General Electric's jet engine JV, CFM International, received over $36 billion in orders at the Farnborough Airshow, exceeding predictions of $30 billion. Not only will General Electric see a one-time gain from making the engine, but the company will benefit from long-term service agreements for maintenance, repair, and overhaul.

Synchrony Financial IPO slated for the second half of 2014

Lastly, General Electric should benefit from the IPO of Synchrony Financial. While there are conflicting reports, it appears that the company is targeting the IPO for sometime in Q3 2014 and no later than Q4 2014.

According to an SEC filing, General Electric will sell 125 million shares, or 15%, of Synchrony Financial stock at a price of $23 to $26. Using the midpoint of $24.50, the company would raise $2.9 billion after expenses and value the entirety of Synchrony at $20.3 billion, above previous estimates of $18 billion to $20 billion.


Shares of General Electric are down roughly 4% since the company posted its Q2 2014 results. However, I think this decline represents a buying opportunity.

The company is well on its way to converting into a pure-play industrial stock, which should, in theory, boost its valuation closer to its industry peers. In addition, General Electric is also paying you to wait, offering a 3.40% yield with double-digit growth, above average for other blue-chips and easily beating treasuries.

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.