General Electric: Strong Upside Potential In 2012

Apr. 9.12 | About: General Electric (GE)

Electricity is something the majority of us in the modern world take for granted. It's easy to forget that in some parts of the world, instant light isn't granted at the flick of a switch. But access to household electricity could soon become the norm in the African country of Nigeria, where currently efficiently working electricity is almost unheard of.

In early April, General Electric (GE) announced that it had signed a contract with the Nigerian government to provide electricity distribution services across the country. The deal spans a period of five years, in which around $10 billion is due to be invested in Nigerian power distribution (although General Electric hasn't promised to provide all of these funds - in fact, it has stated it will likely only invest between $1 billion and $1.5 billion.) The Nigerian government hopes that this agreement will lead to electricity production and distribution services in the nation being provided privately, rather than by the state, which has proved to be inefficient.

Although Nigeria is not yet a fully developed economy, and much of its potential has been diminished through mismanagement and corruption in government, it has an abundance of natural resources as well as a population of 160 million ready to provide low wage labor. The country has incredible oil wealth in addition to natural gas deposits, resources which could significantly boost the economy if marketed effectively. Privatization through this latest deal with General Electric is certainly a step towards future prosperity.

But what about General Electric? There is no doubt the company recognizes the risk in investment in Nigeria, but is taking this into account by avoiding promises of regular funding over the five-year contract. It would be perfectly possible for the company to back out financially if things didn't go well. If it does, this investment could pay off with dividends. Establishing a connection to a country with large deposits of natural resources is an intelligent move, given that fossil fuel stocks are rapidly declining. As a conglomerate corporation, success in this project could seep into other areas of General Electric's empire.

How will the company's biggest rivals, Unit Technologies (UTX) and Siemens AG (SI) react to the news of this contract? Given that the companies are, like General Electric, conglomerate corporations, it is hard to pinpoint how this new deal will affect them. If the deal is a success, it is possible they too will look for credible investment opportunities across Africa. As electricity distribution tends to be a natural monopoly market, it is unlikely General Electric will have to worry about competition in this respect.

General Electric has not enjoyed a strong market performance over the last few years. One reason for this is its association with the large scale Fukushima I nuclear power plant disaster, which made headline news for weeks after its occurrence. The six reactors involved in the catastrophe were designed by General Electric, and remained in operation despite receiving design criticism since as far back as 1972. The disaster shocked investors, and unsurprisingly General Electric's stock value took a hit.

But the effects of the Japanese disaster were short-lived, and I think there was good reason for this. Less than 1% of General Electric's revenue in 2010 was from nuclear power; it is not the focus of the conglomerate organization, and there is therefore no reason for it to face severe market consequences when the industry faces trouble. In fact, companies switching from nuclear power to other energy production forms could benefit General Electric: around 40% of the company's annual energy sales (which amount to almost $31 billion) are accounted for by gas and wind turbine production. The market was quick to realize this, and General Electric's stock value regained some of its steam.

Aviation is another industry in which General Electric is involved. At the end of 2011, the company's annual fiscal report indicated profits in this area would be low due to high investment in research and development. This is great news for long-term investors, as although current dividends won't be impressive, the company is securing its future market position at a crucial time.

There is much uncertainty in the aviation industry due to the increasing cost of fuel, which is proving to be damaging. With the added pressures of reducing pollution, aviation companies are finding it tough - it is essential General Electric continually pursues rising standards of innovation to face these challenging times. Conglomerate competitor Honeywell International (HON) is placing its bets in China, in the belief that the rising prosperity of this nation will bring with it high demand for air travel.

Another deal recently won by General Electric, worth around $200 million, will have the company supply steam turbine technology along with power generation services to the PP10 power plant in Saudi Arabia, which supplies power to its central region. The power plant will switch from simple to combined-cycle operation, allowing it to add around 4000 megawatts of power distribution annually and increase grid capacity in the long run.

General Electric already had an established relationship with the Saudi Arabian power organization, which was essential in securing the contract. Company rival Toshiba (TOSBK.PK) is unlikely to be thrilled with this news, as it attempts to penetrate the power generation market, expanding from its traditional electrical product production roots. Toshiba has, however, secured a deal to supply steam turbines and generators for the US Holcomb expansion project.

The General Electric stock, which is currently trading at around $20 a share, has not enjoyed a stellar performance over the past decade. But this could be set to change as the energy industry transforms from one reliant on fossil fuels to one utilizing new green technology. The company's conglomerate structure increases the safety of stock market investment; if one industry declines, it is often the case that another rises. At this stage, I would recommend investment in General Electric, while keeping an eye on the company's latest deal in Nigeria.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.