GE Part VIII: Capital Segment Analysis

| About: General Electric (GE)
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Summary

This article offers up a deeper dive into GE Capital.

GE Capital is compared to BAC, JPM and C on the basis of revenues, profit, profit margin and return on assets.

This analysis derives a value of $132 billion for the capital segment of GE.

GE is making a concerted effort to reduce exposure to the capital segment, and the numbers show progress is being made.

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 VIII 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

Part VII: Lighting segment analysis

Company Breakdown

This is part eight 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 Capital 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.

GE's Capital Segment

According to the GE Capital website, the capital segment "is an extension of GE's rich heritage of building and supporting growth… We bring insight, knowledge and expertise to every loan." GE is able to offer financing for customers of other divisions, working with customers to grow their business. GE brings more than capital to each loan; GE brings the expertise of the sectors they are operating within.

In 2013, the capital segment had revenues of $44.067 billion and profits of $8.258 billion. Compared to 2012, revenues decreased 2.86% and profits increased 12.48%. The effects on revenue in 2013 compared to 2012 decreased as a result of a planned reduction in GE Capital. Profit margin increased from 16.2% in 2012 to 18.7% in 2013. GE increased profit with decreasing revenue which is impressive. The profit margin increased over 15% from 2012 to 2013.

Diving further into the capital segment, an analysis of the productivity of GE Capital's assets can be performed. Within GE Capital, several operating segments exist, each segment offers different metrics.

Segment Assets

2012

2013

Δ '12-'13

Commercial Lending and Leasing

181.375

174.357

-3.87%

Consumer

138.002

132.236

-4.18%

Real Estate

46.247

38.744

-16.22%

Energy Financial Services

19.185

16.203

-15.54%

GE Capital Aviation Services

49.42

45.876

-7.17%

Segment Revenue

     

Commercial Lending and Leasing

16.458

14.316

-13.01%

Consumer

15.303

15.741

2.86%

Real Estate

3.654

3.915

7.14%

Energy Financial Services

1.508

1.526

1.19%

GE Capital Aviation Services

5.294

5.346

0.98%

Segment Profit

     

Commercial Lending and Leasing

2.401

1.965

-18.16%

Consumer

3.207

4.319

34.67%

Real Estate

0.803

1.717

113.82%

Energy Financial Services

432

410

-5.09%

GE Capital Aviation Services

1.22

0.896

-26.56%

Comparing the numbers from 2012 to 2013, the data shows a drop in assets across all segments in GE Capital. This aligns with GE's plan to continue reducing the overall share of the capital segment. Even though GE is decreasing the asset base, the revenue increased in all segments with the exception of Commercial Lending and Leasing. Profit increased in both the Consumer and Real Estate segments of GE Capital.

Through the first nine months of 2014, the capital segment generated revenues of $31.213 billion and profits of $5.128 billion. Revenues for 2014 decreased 5.4% and profits decreased 8.9%. The chart below shows the year-over-year change through the first three quarters of 2013 compared to the first three quarters of 2014. As expected, with lower revenues, lower profit margin usually follows. GE's profit margin shrunk 3.7% over the first three quarters of 2014 compared to the first three quarters of 2013.

 

Q3 YTD 2013

Q3 YTD 2014

Growth

Revenue

32.99

31.213

-5.4%

Profit

5.63

5.128

-8.9%

Profit Margin

17.1%

16.4%

-3.7%

The capital segment of GE has been pretty quiet in the acquisition space of late. As GE is in the process of reducing exposure to the capital space, GE Capital has seen its fair share of dispositions. In 2013, GE sold portions of Cembra and sold the company's remaining equity in Bank of Ayudhya. So far in 2014, GE Capital is selling a consumer finance business GE Money Bank AB, which should close in the fourth quarter. In July of 2014, GE Capital spun of its North American retail finance unit through an IPO as Synchrony Financial (NYSE:SYF); GE still owns the majority of Synchrony and plans to continue reducing its stake in the company.

 

2010

2011

2012

2013

Δ '10-'11

Δ '11-'12

Δ '12-'13

Ave '10-'13

Revenue

49.163

48.324

45.364

44.067

-1.71%

-6.13%

-2.86%

-3.56%

Profit

3.083

6.48

7.342

8.258

110.18%

13.30%

12.48%

45.32%

Profit Margin

6.3%

13.4%

16.2%

18.7%

113.83%

20.70%

15.79%

50.11%

Unlike previous segments, GE is trying to reduce the exposure to GE Capital. In order to reduce the effect of the capital segment on the overall company, GE has two options. These two options are; grow the rest of the business or shrink the capital segment. GE has chosen to blend these two options together and invest in the other segments while reducing the size of the capital segment. Shrinking the percentage of the capital segment compared to the overall company is primarily being driven by the risk of operating a bank. GE Capital single handedly almost ruined the company during the financial crisis a couple years ago and the wounds created will take years to repair. These wounds are system wide and comparing GE to the competition may shed a little light on if the wounds are affecting GE the same way as the competition.

The Competition

Let's take a look at how GE compares to the competition in the capital sector. The three comparisons I selected were Bank of America (NYSE:BAC), the JP Morgan (NYSE:JPM) and Citigroup (NYSE:C). All of the values below were gathered from the company's 2013 annual reports and revenue/profit numbers are in billions.

GE Capital

           
 

2011

2012

2013

Δ '11-'12

Δ '12-'13

Ave '11-'13

Assets

584.64

539.35

516.83

-7.75%

-4.18%

-5.96%

Revenue

48.324

45.364

44.067

-6.13%

-2.86%

-4.49%

Profit

6.48

7.342

8.258

13.30%

12.48%

12.89%

Return on Assets

1.11%

1.36%

1.60%

22.82%

17.38%

20.10%

Profit Margin

13.4%

16.2%

18.7%

20.70%

15.79%

18.24%

             

Bank of America

           
 

2011

2012

2013

Δ '11-'12

Δ '12-'13

Ave '11-'13

Assets

2296.3

2191.4

2163.5

-4.57%

-1.27%

-2.92%

Revenue

93.454

83.334

88.942

-10.83%

6.73%

-2.05%

Profit

1.446

4.188

11.431

189.63%

172.95%

181.29%

Return on Assets

0.06%

0.19%

0.53%

203.50%

176.46%

189.98%

Profit Margin

1.5%

5.0%

12.9%

224.80%

155.74%

190.27%

             

JP Morgan

           
 

2011

2012

2013

Δ '11-'12

Δ '12-'13

Ave '11-'13

Assets

2265.8

2359.1

2415.7

4.12%

2.40%

3.26%

Revenue

97.234

97.031

96.606

-0.21%

-0.44%

-0.32%

Profit

18.976

21.284

17.923

12.16%

-15.79%

-1.81%

Return on Assets

0.84%

0.90%

0.74%

7.72%

-17.76%

-5.02%

Profit Margin

19.5%

21.9%

18.6%

12.40%

-15.42%

-1.51%

             

Citigroup

           
 

2011

2012

2013

Δ '11-'12

Δ '12-'13

Ave '11-'13

Assets

1873.9

1864.7

1880.4

-0.49%

0.84%

0.18%

Revenue

77.3

69.1

76.4

-10.61%

10.56%

-0.02%

Profit

11.1

7.5

13.7

-32.43%

82.67%

25.12%

Return on Assets

0.59%

0.40%

0.73%

-32.10%

81.14%

24.52%

Profit Margin

14.4%

10.9%

17.9%

-24.41%

65.21%

20.40%

GE's capital segment is in last of the four when considering revenue growth. GE is second from last when considering profit growth. Both of these metrics are expected as the competition is trying to grow while GE is trying shrink GE Capital. Additionally the comparison is a little difficult as all four of these financial companies derive revenue and profits in different ways. BAC, JPM and C all have significant brokerage segments that fluctuate based on the various markets. Due to the different sources of revenue and profit, one would expect the profit margins to differ. GE shows the second highest profit margin and also shows consistent profit margin growth. C and JPM have profit margin growth all over the place, mostly due to one-time charges and other issues that come from operating in the financial sector. BAC shows strong profit margin growth, this is mostly due to starting from a low level to begin with. One additional area to look at when reviewing financial firms is return on assets. GE shows the strongest return on assets and also consistent growth. GE capital may not be the strongest of the competition, but seems to be the most consistent. Based on the numbers presented, several generalizations can be made:

  • Revenue growth appears to be hard to come by when looking at these four companies
  • GE shows strong return on assets while the other four have less than desirable levels of return on assets
  • With the size of these institutions, significant asset or revenue growth may be hard to come by.

One thing to keep in mind is the capital segment is only a small piece of the GE total P/E. Based on 2013 revenues, the capital segment is the largest portion of the company, making up 30% of the overall company. I would anticipate this percentage to be significantly lower over the course of the next five years. GE has made a pledge to grow the other segments and reduce the capital segment. Below is each company's P/E ratio from Google Finance at the time of this analysis.

 

P/E Ratio

GE

17.25

BAC

46.52

JPM

11.44

C

18.82

Considering the analysis above, GE's capital segment appears to be operating effectively compared to others in the financial sector. As GE is working to reduce the company's exposure to the capital segment, GE Capital will shrink over the coming years.

Valuing the Capital 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. GE Capital appears to be a consistent operator in an inconsistent sector. Based on the consistency and GE's efforts to shrink the capital segment, trading at the market multiple is justifiable. Applying the multiple of 16.09 to GE Capital's 2013 segment profit of $8.258 billion, the capital segment can be estimated to a value of $132.87 billion. The $132.87 billion is higher than my estimate of $120.7 billion suggested in the original analysis. The previous analysis just valued the company based on the industry the company operated without considering other factors.

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 Capital is in the middle of the pack. We are able to estimate that the capital segment is contributing $132.87 billion of the overall $271 billion value of the total company. As GE has already shown their desire to shrink their exposure to the capital segment, the value of this segment should decrease over the coming years.

Please see the Company Background section above for links to Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation and Lighting segment analysis articles.

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.