General Electric (NYSE:GE) has been a part of thousands of American households for almost a century due to its numerous consumer appliances. The brand has been a significant part of the average American household and the company's products have been fairly popular. This is the major reason why the company's decision to sell its appliance unit came as a shock to the entire market.
The company's reasons, however, varied and justified its decision to sell the unit. This, however, brings us to the question of whether or not this decision will be favorable for the investors of the company. A decision of this magnitude obviously has a massive impact on the company's value and the valuation of its stock.
Let's take a look at the factors that compelled the company to take this decision and the impacts that this decision will have on the company's stock.
The company's talks with the Swedish company Electrolux (OTC:ELUXF) regarding the possible sale of its appliances segment have been under the limelight owing to a number of factors. The most important being the fact that the company's appliances division has not been generating negative returns. The division has remained profitable and has contributed to around 8-9% of its total industrial segment revenues.
During the year 2013, this division reported sales of $8 billion and a profit of $381 million. These statistics show anything but a weak segment of the firm. However, the company believes that this segment has been reporting declining profits and despite the fact that the company invested an additional $1 billion in the division during 2008 to help increase its profit margins and profitability, the results were not achieved and the profit margins of the division kept falling as a result of which the company is finally considering to sell this division off.
Despite the fact that a profitable segment is being sold off by the company, the decision can be seen as good news for investors owing to a number of reasons.
The company can focus on its core competencies:
The company now plans on focusing on building and servicing large equipment that will be used for huge projects. The plans include developing aircraft engines, oil and gas drilling equipment and gas fired turbines. By shifting away from the consumer goods section, the company will be able to utilize all its resources in something that is going to prove to be far more profitable for the company. This will also allow the company to gain strength in a segment that it is already strong in as a result of which it may be able to minimize competition. As a result of this, the company's value will increase which will be reflected in the value of the stock of the company as well. The investors of the company will see an increase in the value of their investment due to this decision of the company.
GE's industrial segment margins will increase:
GE has been trying to focus mainly on increasing its industrial segment margins. The company indulged in large scale cost reduction policies that resulted in the company's industrial segment margins rising by 66 basis points.
In 2014, the company aims to continue with its industrial margin growth and plans to slash another $1 billion from its costs to be able to attain its goal of higher industrial segment margins. The company's appliances segment has been a rather low margin segment and it is predicted that its sale will allow the company to achieve its aim of higher margins. This is good news for investors as this will make the company more attractive and will increase returns on their investments.
When deciding whether or not to sell a segment of the business, a company has to take a lot of factors into details. The main decision is obviously based on the company's priorities as well as its goals. For General Electric, the main goal at present is to be able to significantly increase its profit margins. Revenue generation is not as important to the company at present as increasing profit margins of the firm. This approach can be seen as a highly beneficial approach for the investors as this shows that the company wants enhanced profitability, which then results in higher returns for the investors.
Despite the fact that GE has managed to remain popular amongst the household appliances division amongst consumers, the segment simply is not as profitable as other divisions of the company. For the company to continue investing into this division to make it more profitable is a misuse of its resources. Deciding to sell this division will result in higher profit margins for the company, which will result in higher returns for the investors and a possible appreciation in the value of the company's stock.
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