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One Thing Is Going Right For General Electric

Apr. 03, 2018 12:24 PM ETGeneral Electric Company (GE)85 Comments

Summary

  • A lot of turmoil has hit General Electric over the past year as surprise after surprise has hammered the business.
  • You wouldn't think that one of its hardest-hit businesses in recent years would be a contributor to the company's improvement, but that's what's happening.
  • The segment also has attractive catalysts and management is innovating to find excellent value.
  • This could be a great rebound for the company, but my preference is for the segment to be sold off.

*Taken from General Electric

For all the pain shareholders in General Electric (NYSE:NYSE:GE) have been through in the company over the past year, there do exist several bright spots to consider. One that I haven’t talked about previously, but that could be on the verge of posting a recovery, is the conglomerate’s Transportation segment. Despite falling sales over the past couple of years now, an aging fleet of locomotives and management’s efforts to think outside of the box may be setting the stage for attractive value in the years to come.

Transportation has suffered

2017 wasn’t a particularly positive year for General Electric’s Transportation business. As you can see in the graph below, both revenue and segment profit hit an at-least five-year low. Revenue fell from $4.71 billion in 2016 to $4.18 billion last year for a drop of 11.4% year-over-year. What’s more, sales in both years were substantially lower than in prior years, especially 2015 when revenue totaled $5.93 billion.

*Created by Author

Profits have also fallen materially in the recent past. After hitting $1.27 billion in 2015, they plunged to $1.06 billion in 2016 before finally dropping further to $824 million last year. Because a sizable portion of the business’ sales come from the construction and sale of locomotives, mining equipment like drive systems, and engines for both onshore and offshore drilling rigs (all of which are asset-intensive businesses), margins tend to be slim anyways. This means that a dollar drop in sales should lead to a much larger decline in profitability.

When I first began looking at these figures, I figured that like other parts of General Electric, Transportation is undesirable and should be offloaded for whatever management can get. I do still feel that the business should be spun off, but after a deeper dive I am of the opinion

This article was written by

Daniel Jones profile picture
27.49K Followers
Robust cash flow analyses of oil and gas companies

Daniel is an avid and active professional investor. He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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