- The Good: GE can experience potential tax benefits for its renewable energy projects.
- The Bad: If the company misses out on looking to add Dresser-Rand to its portfolio.
- The Ugly: If something catastrophic would have happened to plane where a GE engine failed.
- GE is a huge conglomerate with lots of moving parts and that is a risk in of itself which investors should be aware of before investing in the company.
In good news related to alternative energies, the Internal Revenue Services has said that renewable energy projects can qualify for tax benefits if they incurred a minimum of 3% of the total project cost before the beginning of 2014. This can potentially be a windfall for General Electric (NYSE:GE) as it is big in the wind power industry. The company stated on its second quarter conference call that it delayed $1 billion worth of orders during the quarter due to the cloudiness surrounding the tax benefit topic.
The Bad (Only "Bad" If The Company Misses Out On The Opportunity)
About a week ago Dresser-Rand (NYSE:DRC) hired Morgan Stanley (NYSE:MS) to prepare for potential buyout bids from companies who could benefit from tucking the company into their portfolio of services. A Bloomberg report suggests that potential bidders may include Siemens (OTCPK:SIEGY) but I would like to actually see GE swipe at it. Dresser-Rand is an excellent growth story and supplier of custom-engineered rotating equipment solutions for long-life, critical applications in the oil, gas, chemical, petrochemical, process, power generation, military and other industries in various countries.
An acquisition of this nature could help GE's oil and gas segment along with the Lufkin purchase which was made about a year ago. Hiring an investment firm such as Morgan Stanley doesn't necessarily mean the company is up for sale either though; it could be a strategy to help build a defense mechanism so that the company can remain independent. I don't own shares of Dresser-Rand but when I saw the hiring of Morgan Stanley I felt that GE should be taking aim at this company. I would welcome a purchase of this nature much more enthusiastically than the Alstom purchase made earlier this summer.
I would definitely consider adding Dresser-Rand to my growth portfolio when I feel oil prices are coming back up. I've made the conscious decision in the past month or so to lighten up on my oil stocks in the growth portfolio because I felt that oil prices were coming down. I felt that oil prices should be coming down because I don't believe the economic growth around the world is doing well currently. I believe it probably will only get worse as layoffs continue to happen. We've seen large companies such as Amgen (NASDAQ:AMGN), Allergan (NYSE:AGN) and Cisco (NASDAQ:CSCO) announce layoffs just in the past couple of weeks.
The Ugly (Or What Could Have Been Ugly News Anyway)
GE built a GEnx-1B jet engine which failed during the flight of a Thomson Airways plane built by Boeing (NYSE:BA). The issue occurred last week as a 787 Dreamliner was carrying 288 passengers from the Dominican Republic and had to divert to the Azores. No explanation has been given yet as to why the problem happened, but thankfully the plane landed safely and nobody was reported hurt. You can almost guarantee that the airline industry would have taken a hit if something catastrophic would have happened to this flight as travelers must already be anxious about recent airline issues in relation to downed Malaysian Airline flights.
To sum up, on the bright side, the company should be able to recognize some benefits with the clarity given by the IRS recently around renewable energy. Some potential "bad news" that can take place at the company is if the company doesn't look into acquiring Dresser-Rand. Even if the company were to pay $7 billion for Dresser-Rand (a 35% premium from today's price) it would be able to make at least two more purchases of the same size in companies with excellent growth expectations which could outshine the Alstom purchase from earlier in the summer. It could only be "bad news" if you take a look at the return on investment on a potential purchase of Dresser-Rand and two other equivalent companies and compare them against the return on investment for Alstom after a couple of years. What could have been really ugly news is if something bad happened to the plane which was diverted due to the engine that GE manufactured. The travel industry is on edge right now and doesn't need any additional bad news.
I don't believe investors can expect a huge conglomerate such as GE to operate smoothly all the time - there will bound to be hiccups every now and again. Safety however should be of paramount importance no matter which segment of the business you're talking about. There are just so many moving parts underneath the umbrella and investors need to realize that this is the risk of owning shares in the company. As always, best of luck on any investments you choose.
Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!