GE Part VII: Lighting Segment Analysis

| About: General Electric (GE)
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Summary

This article offers up a deeper dive into the lighting segment of GE.

GE's lighting segment is compared to Cree, the lighting segment of Philips and Whirlpool.

The analysis derives a value of about $6.13 billion for the appliance & lighting segment. When the appliance sale is removed, the lighting segment has a remaining value of $2.83.

Company Background

General Electric (NYSE:GE) is a massive corporation that is more or less eight individual companies operating under one roof. This is part VII of an eight part series taking a deep dive into GE's eight individual operating segments. Please refer to my previous articles investigating GE for further company background.

GE: The Sum Of All Of The Parts

GE Part I: Power and Water Segment Analysis

GE Part II: Oil and Gas Segment Analysis

GE Part III: Energy Management Segment Analysis

GE Part IV: Aviation Segment Analysis

GE Part V: Healthcare Segment Analysis

Part VI: Transportation Segment Analysis

Company Breakdown

This is part seven of diving deeper into each of the eight individual operating units of GE. One method of analysis is to look at each segment individually. The analysis in this article will focus on revenues, profits, growth and opportunities for the lighting segment. All GE segment revenue and profit numbers for 2010 through 2013 were collected from the 2013 annual report. Data for 2014 was collected from the 2014 third-quarter report.

This analysis will focus on the appliance & lighting segment as this was a single unit until the appliance business was sold to Electrolux. I will remove the value of the appliance business when calculating the value of the company. GE and Electrolux came to terms valuing the appliances division at $3.3 billion dollars.

GE's Lighting Segment

According to the GE Lighting website, the lighting segment is focused on bringing lighting solutions to all corners of the globe. GE was founded around the invention of the light bulb and continues to advance this historic technology. The segment is over 130 years old and was established around the first affordable light bulb.

As previously mentioned, the numbers in this analysis include the full appliance & lighting segment, I will subtract out the appliance division towards the end of this analysis.

In 2013, the appliance & lighting segment had revenues of $8.338 billion and profits of $0.381 billion. Compared to 2012, revenues increased 4.66% and profits increased 22.51%. The effects on revenue in 2013 compared to 2012 were driven by higher volume in appliances. The profit increase was a result increased productivity and higher volume. Profit margin increased from 3.9% in 2012 to 4.6% in 2013. While any gains in profit margin are nice to see, sub 10% profit margins are not very appealing to investors. This low profit margin is one of the big reasons GE wanted to sell off the appliances segment.

Unlike other segments, GE does not offer backlog information related to the appliance & lighting segment. This makes perfect sense as the appliance & lighting segment is targeted towards consumers and are not capital purchases. The appliance and lighting segment seems to track closely with the rise and fall of the housing market. This again makes sense as new buildings come with new appliances and lighting solutions. Due to this fact, estimating future revenue for this segment can be difficult, offering another reason why GE was interested in selling the appliance division.

Through the first nine months of 2014, the appliance & lighting segment generated revenues of $6.094 billion and profits of $0.243 billion. Revenues for 2014 decreased 0.8% and profits increased 1.7%. The chart below shows the growth through the first three quarters of 2013 compared to the first three quarters of 2014. Even though the revenues decreased year over year, the appliance & lighting segment was able to increase the profit margin. The profit margin increased from 3.9% in 2013 to 4.0% in 2014.

 

Q3 YTD 2013

Q3 YTD 2014

Growth

Revenue

6.142

6.094

-0.8%

Profit

0.239

0.243

1.7%

Profit Margin

3.9%

4.0%

2.5%

The appliance and lighting segments of GE have been pretty quiet in the acquisition space of late. The last acquisition in this segment was in 2012 when GE acquired Albeo technologies. Albeo is a manufacture of LED fixtures and offers GE the opportunity to move into the high bay LED market. High bay lighting often hangs 30-40 feet in the air in commercial, retail, industrial and warehouse settings. In 2011 GE acquired Lightech, which is another company offering advances in LED lighting applications.

Any revenue growth generated in 2013 and 2014 was driven organically, while 2011 and 2012 appear to have some revenue driven through acquisition. Below is a chart showing revenue, profit and profit margin from 2010 through 2013, all values are in billions for the appliance & lighting segment.

 

2010

2011

2012

2013

Δ '10-'11

Δ '11-'12

Δ '12-'13

Ave '10-'13

Revenue

7.957

7.693

7.967

8.338

-3.32%

3.56%

4.66%

1.63%

Profit

0.404

0.237

0.311

0.381

-41.34%

31.22%

22.51%

4.13%

Profit Margin

5.1%

3.1%

3.9%

4.6%

-39.32%

26.71%

17.06%

1.48%

Similar to previous segments, GE has grown the appliance & lighting segment organically, through collaborations and acquisition. As this analysis will point out later, the main driver of revenue and profit in this segment was the appliance component. The remaining lighting segment will be a small component of the overall GE picture and for this reason and other reasons I will mention later, I believe the lighting segment will be on the sale block shortly. The only reason I believe GE would keep the lighting business around would be due to the historic ties to the company.

The Competition

Let's take a look at how GE compares to the competition in the appliance & lighting sector. The three comparisons I selected were Cree (NASDAQ:CREE), the lighting segment of Koninklijke Philips (NYSE:PHG) and Whirlpool (NYSE:WHR). All of the values below were gathered from the company's 2013 annual reports and revenue/profit numbers are in billions. Please note, PHG figures are in Euros, but keep in mind, we are interested in the rates and rations, so the currency should not matter as long as it is consistent year to year.

GE Appliance & Lighting

       
 

2011

2012

2013

Δ '11-'12

Δ '12-'13

Ave '11-'13

Revenue

7.693

7.967

8.338

3.56%

4.66%

4.11%

Profit

0.237

0.311

0.381

31.22%

22.51%

26.87%

Profit Margin

3.1%

3.9%

4.6%

26.71%

17.06%

21.88%

             

Cree

           
 

2011

2012

2013

Δ '11-'12

Δ '12-'13

Ave '11-'13

Revenue

1.164

1.385

1.647

18.99%

18.92%

18.95%

Profit

0.044

0.087

0.124

97.73%

42.53%

70.13%

Profit Margin

3.8%

6.3%

7.5%

66.18%

19.86%

43.02%

             

Koninklijke Philips

         
 

2011

2012

2013

Δ '11-'12

Δ '12-'13

Ave '11-'13

Revenue

7.638

8.442

8.413

10.53%

-0.34%

5.09%

Profit

0.399

0.128

0.695

-67.92%

442.97%

187.52%

Profit Margin

5.2%

1.5%

8.3%

-70.98%

444.84%

186.93%

             

Whirlpool

           
 

2011

2012

2013

Δ '11-'12

Δ '12-'13

Ave '11-'13

Revenue

18.666

18.143

18.769

-2.80%

3.45%

0.32%

Profit

0.39

0.401

0.827

2.82%

106.23%

54.53%

Profit Margin

2.1%

2.2%

4.4%

5.78%

99.36%

52.57%

GE's appliance & lighting segment is in the middle of the road when considering revenue growth. GE had the lowest profit growth of the group, but the profit growth was still an impressive 26.87%. Cree offers the strongest revenue growth and is a greater representation of what GE lighting segment will be after the sale of the appliance business. Considering the profit margin, all four companies show nice profit margin growth. However, all four also have profit margins well below 10% which worries me as the appliance & lighting industries appear to have razor thin margins. Of the competition GE appears to have the most consistent results year over year. Cree offers impressive growth but the profit growth rate is all over the place. Based on the numbers presented, several generalizations can be made:

  • Low profit margin is the name of the game in the appliance and lighting space
  • Over the time frame analyzed, Cree appears to be the cream of the crop due to growth in revenue and profit
  • Lighting offers superior growth rates over the appliance sector

One thing to keep in mind is the appliance & lighting segment is only a small piece of the GE total P/E. Based on 2013 revenues, the appliance & lighting segment is only 6% of the overall company. I would anticipate this percentage to be significantly lower once the appliance component is sold. Below is each company's P/E ratio from Google Finance at the time of this analysis.

 

P/E Ratio

GE

16.56

CREE

35.36

PHG

30.33

WHR

19.48

Considering the analysis above, GE's appliance & lighting segment appears to be just another company in the appliance and lighting sector. GE offers consistency in revenue, profit and profit margin growth.

Valuing the Appliance & Lighting Segment

As done in my initial article, GE: The Sum of All of the Parts, I just took the average of the competition and estimated the value of this segment. According to FactSheet, the earnings expected in 2014 for the S&P 500 are $128.57, giving the market a multiple of 16.09 as of market close on Monday, November 24, 2014. Utilizing these numbers, an average stock should trade at the market multiple. I feel that based on the growth rate of the appliance & lighting segment, GE Appliance & lighting should trade at a premium to the market multiple. However, as mentioned earlier in the article, the majority of the growth year over year was generated by the appliance division. As the appliance division is being sold, I will stick with the market multiple for this segment of 16.09. Applying the multiple of 16.09 to GE's 2013 segment profit of $0.381 billion, the appliance & lighting segment can be estimated to a value of $6.13 billion. The $6.13 billion is higher than my estimate of $4.4 billion suggested in the original analysis. The previous analysis just valued the company based on the industry the company operated without considering other factors.

When subtracting the $3.3 billion out for the sale of the appliances business, the lighting segment appears to have a value of $2.83 billion.

Conclusion

GE is a very complex company operating in eight different segments. An overall estimate for GE can be made by evaluating each individual segment as a standalone company. Comparing GE to the competition, we are able to draw conclusions that GE is in the middle of the pack. We are able to estimate that the appliance & lighting segment is contributing $6.13 billion of the overall $271 billion value of the total company. As GE has already shown their willingness to shed operating segments, one has to wonder if the lighting segment is next on the chopping block.

Please see the Company Background section above for links to Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare and Transportation segment analysis articles. Please continue watching Seeking Alpha for the upcoming analysis of GE Capital.

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.