In market corrections such as the one that took place on Monday, strong blue-chip stocks are a good investment choice to buy on the rebound. General Electric Company (NYSE:GE), the oldest member of the Dow Jones Industrial Average, certainly fits this bill. But there is plenty to be excited about surrounding this iconic company besides a likely bounce back from the dip in the stock price this week.
The company is the latest to go through what is being referred to as deconglomeration. This is the trend of large, diversified companies selling off parts that don't fit well with the overall strategy. In this case, GE is selling its financial segment, which will positively impact the company's stock price in a number of ways. The resulting company will be better poised to reap the benefits of emerging market trends and will be more valuable for shareholders.
Divesting Financial Assets
In April, the company's CEO Jeff Immelt announced that the company would sell off most of GE Capital, GE's financial-services business. The announcement caused the stock to jump that day, climbing 14% and closing at $28.51. Investors and analysts alike were excited about the move to make the company a coherent whole built around its industrial businesses.
Figure 1. Source: YCharts
But those gains have been wiped out since then, as the excitement over the overdue unloading of the financial business subsided and the overall market corrected. This represents a strong buying opportunity for long-term investors, as the company has proven rather successful at selling off its financial arms so far. In just the last couple of weeks, GE sold its health-care lending business for $9 billion and its online deposit platform for $16 billion in deposits.
These are just the latest in a series of moves that will culminate in GE Capital ending net investment by $200 billion by the end of 2016, when the company will be largely done with its exit strategy. By 2018, the company will be 90% industrial, as it will hold onto its financial operations that assist industrial customers buying GE products. The Federal Reserve announced in July that it would give GE until 2018 to have to start preparing for "stress tests," since the company is clearly and demonstrably reducing GE Capital's assets.
This is just one way that GE scaling back its banking business will help the overall company, though. While decreasing its vulnerability to financial markets will have a direct benefit in times of financial turmoil, such as the financial crisis of 2008, it will also make it easier for investors to analyze the stock, as banking and industrial institutions are measured quite differently.
In addition, having a conglomerate of different businesses that were largely, if not totally, unrelated hardly ever works. Simply put, the unrelated capital business is more valuable to another company that can take fuller advantage of it, meaning it is worth more. This can be seen in some of the deals that GE has completed so far, such as Capital One Financial Corporation (COF) paying a premium for the health-care lending operations.
The most important benefit of selling off GE Capital will be the company returning its focus entirely to its industrial roots, instead of placing resources on appliances and media like it has in the past. This increased focus will allow the company to be a bigger, stronger company in two rapidly growing markets: providing infrastructure for developing countries and the energy storage business.
Developing Countries' Infrastructure Needs
Narrowing the company's focus will give GE benefits as it relates to synergies. The remaining business will include things such as aircraft engines, oil & gas production equipment, medical imaging, and other industrial products. These products are similar in that they all spin, and there are certain technological overlaps that increase the value to GE.
Just as interesting, many of these products are key for developing countries, which GE is attempting to offer a one-stop shop for. It has put its industrial products into one business collection that will assist developing countries, selling large sets of products and expertise directly to their governments and the businesses that those governments run.
These countries provide huge growth opportunities. Developing and even non-developed countries need the industrial solutions and expertise that GE offers, including electricity, rail and air transportation, and health-care services, to name a few. Targeting these developing countries is a smart move, but one that Immelt and GE have been discussing since at least 2005, seen in this New York Times article.
Getting rid of most of the GE Capital business emphasizes this strategy and lets GE focus, instead of having to worry about banking regulations and other concerns that are involved in the unrelated businesses. In addition, the company is growing its software business, which might seem unrelated to the industrial business it is now focusing its efforts on.
But the services business is a key revenue generator relating to the company's industrial solutions as the Internet-of-Things and connected devices continue to increase in popularity. By growing its software business, which also works with other companies' equipment, not just its own, the company can analyze massive data streams and perform predictive analytics for companies in another quickly growing field. With revenues for 2015 projected to be $6 billion, this integrated business shows how the more streamlined, coherent company is adding value for shareholders.
Energy Storage Business
Another rapidly growing market that is overlooked by investors is the energy storage market, where Tesla Motors (TSLA) and Elon Musk's other business operations tend to earn most of the headlines. With GE's industrial business having such a large reach, as was mentioned earlier, the company is in a great position for this industry. GE is a presence in most utilities in the United States, as well as one of the biggest suppliers of wind turbines and infrastructure solutions providers in the world.
Figure 2. Source: Switzerland Global Enterprise
This gives the GE Energy Storage business significant structural advantages, and it's not like the company is just entering the market and trying to catch the competition either. According to GTM Research, 62 MWh were installed in the US in 2014, a number that is expected to grow rapidly. GE already has 50 MWh of energy storage in the field, showing that it is already a key player in this market.
The company recently announced its third, and the largest, deal to build a lithium-ion storage system. GE agreed to build a 30 MWh energy storage system in Southern California that will be used by Coachella Energy Storage Partners. With installation expected to take place in early 2016, the energy storage business will give the company plenty of future growth in a market where it has a leg up on much of the competition.
Analyst Opinion
With the stock price recently dropping and wiping out much of the gains from the announcement to sell off GE Capital, now is an interesting time to buy this stock. Analysts tend to agree with the bullish fundamental analysis of the company, giving it a consensus rating of buy, according to Yahoo Finance.
Figure 3. Source: Yahoo Finance
Analysts have given the stock a mean target price of $30.08. With the stock price currently trading at $24.45, this target price offers a premium of 23% to investors buying the stock after the market correction.
The stock is also rather attractive for income investors, as the company already offers a dividend yield of roughly 3.8%, a solid return for long-term investors looking for a safe, iconic company. The company will also offer solid dividend growth, as the sale of the GE Capital assets will allow the company to increase the value it returns to its shareholders.
Conclusion
With the US stock market starting to recover from the pullback, now is a great time to invest in GE. The stock price will continue to benefit from the selling off of GE Capital, as the company will be able to increase the amount of value it returns to shareholders. Further, analysts are happy with the move to sell off GE Capital, as it makes the company easier to analyze and gives it a clear, coherent strategy going forward. With plenty of synergies in the infrastructure industry, GE is a strong investment choice at its current price.
I Know First algorithm is bullish on GE over the three-month and one-year time horizons. Our algorithmic forecast for GE, along with an explanation, can be seen here.
