One big reason General Electric's (GE) stock price has been heading higher recently is because it is moving its center of business to different emerging markets for greater profitability in light of its current emerging markets becoming less profitable. Due to increased prices of raw material input and labor costs in China, General Electric sees more profitable opportunities from other emerging markets. I say this because Latin America is seen as General Electric's chief engine of growth, with revenue from its industrial base increasing 36% compared to China's increasing 29%. General Electric does not want to give up a profit margin or 7% of more. I also see General Electric's business diversification, entering Australasia, Africa and the Middle East markets, is taking place due to available local lower labor and raw material costs.
I think General Electric's stock value is going to rise because the United Kingdom's North Sea is has undergone recent discoveries of huge reserves of oil and gas under the seabed. According to reports, this new "oil and gas" rush is prompting an increased demand for sub-seabed engineering solutions. These solutions are needed to mitigate and keep material, machines and workers safe. Because production of both oil and gas in the North has been precipitously declining since 1999, the new discoveries give new life to Britain's oil and gas industry with approximately 20 billion gallons of oil still to be recovered.
The North Sea is having an oil and gas "mini-boom" through its discovery of new, untapped fossil fuel underground. This discovery will in-fact give General Electric a financial boom because it indirectly and directly affects other companies. It directly and positively impacts drilling corporations including Transocean Limited (RIG) as well as Diamond Offshore Drilling (DO) because General Electric provides the engineering design-work. By providing finished materials such as piping, engines, and other drilling materials, General Electric stands to profit the increased business. As many in Britain and elsewhere have found out that this new discovery will keep the oil and gas industry going in this part of the world, General Electric has many years, if not decades of consulting and material creating and delivery profits.
In addition to the exploration and pre-drilling and drilling related services General Electric provides, many oil companies will use its refining and data management programs. Along with its inspection and engineering solutions at refineries, General Electric provides services and technical know-how which regulates everything from transporting oil from the ground to tankers to the moment energy is pumped into consumers' cars and homes. Since energy companies such as Petrobras (PBR) and Exxon Mobil (XOM) use and must replace parts involved in exploration, shipping, and retailing energy, General Electric will benefit because it is a world-wide and competitive supplier of these parts.
Potential Impact From Litigation & Product Recalls
While there has been serious litigation and potential product liability through product recalls, I believe General Electric's diversified business operations will insulate it from a loss. I say this because there are unproven allegations along with the lawsuit not directly impacting consumers. The Bank of New York Mellon sued General Electric's Mortgage Division because they alleged General Electric misrepresented the "nature, characteristics, history and quality" of the loans sold to Bank of New York Mellon. The lawsuit is seeking to compel General Electric to repurchase its loans back from the Bank of New York Mellon. This might be very deleterious for General Electric's business relationships because the lawsuit might potentially damage its reputation. But, these are only allegations that have yet to be proven. Therefore, if the allegations are believed to proven true, or before a final judgment is made, a settlement may be reached to save General Electric's reputation. If the allegations are believed to be determined to be untrue, General Electric still might settle so the media does not distort the lawsuit and paint General Electric in a bad light.
I anticipate the lawsuit that General Electric is facing from The Bank of New York Mellon will not have any effects on profits because of the lawsuit's circumstances and parties. Since the plaintiff is the bank and not one of the actual holders of the residential mortgages, it has not received nearly as much attention in the media. Unlike other lawsuits such as Taco Bell's parent company Yum! Brands (YUM), which has received national news coverage because the beef's integrity was questioned as being genuine, this story has only received coverage in financial journals and news outlets. Therefore, I think that because there is less exposure and the parties to the lawsuit are not customers of General Electric, there is a lower chance of General Electric's profits being hurt.
Therefore, based on my analysis that General Electric is shifting its primary centers of business to hotter markets and its litigation has minimal exposure to customers that contribute to its profits, General Electric's stock price is poised to climb higher in the coming weeks and months.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.