General Electric (NYSE:GE) and CEO Jeff Immelt have taken a significant amount of criticism the past several years. Much of this criticism stems from the stock's general underperformance in the past, as well as reliance on non-core business activities to generate revenue. General Electric is now taking concrete action to divest some of these non-core and underperforming divisions. Although there may be some debate about the value of eliminating specific divisions, shareholders should see a net positive result over the next several years as the company executes a return to its roots and focuses on its strengths.
There is much to read on the history of General Electric's decision to dabble in consumer finance. The bottom line is that the decision had an enormous negative impact on the company during the financial crisis of 2008-2009. The company has plans underway to sell a portion of the division through an IPO, and then offer a tax-free share swap the following year.
On some levels, it would almost seem to make sense to retain the consumer finance division, as it has become much more healthy and now returns a significant portion of total revenue. However, the company has laid out a clear path to return to what it does best, and it intends to see the clear majority of profits come from the industrial divisions in the future.
After previously considering the move in 2008, General Electric is in talks with potential buyers for its appliance division. After opting to not sell the division in 2008, General Electric spent approximately $1 billion on new facilities and to make the division more competitive on a global scale. Although General Electric holds the number two spot in US market share, increasing global competition against companies like Samsung and LG make the potential sale more appealing.
With estimates placing the sale between $1.5 billion and $2.5 billion, the deal is valued at 4-6 times forward earnings based on the $102 million profit for the division last quarter. However, this profit came from $2.1 billion in revenue. Although the price tag may be a bit on the light side, divesting this unit through either a sale or a spin-off will allow General Electric to move closer to the goal of attaining 75% of earnings from its industrial segments.
At this time, General Electric appears to be valued fairly. I recommend keeping the company on your watch list for the next several quarters as the benefits realized from the Alstom deal become more clear. Should there be a pullback in stock price or an overall market correction, I will be prepared to add to my current long position.
As always, do your homework, check the numbers twice, and know what you are getting into.
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.
Additional disclosure: I am not currently adding to my long stock position.