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General Electric’s Shrinkage is a Good Thing

By Industrials FOXBusiness

It’s been a busy month for General Electric (GE), one that has put the industrial giant ahead of schedule in jettisoning the bulk of GE Capital, the finance unit that has been a repellent for investors. Once responsible for nearly half of the company’s earnings, the unit is now on track to be less than 10%, according GE’s Chief Financial Officer Keith Sherin.

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“It gives them a lot more financial flexibility,” Nick Heymann of William Blair tells FOXBusiness.com. Heymann, a longtime GE analyst and former employee, recommended buying the stock this week in part due to GE’s transformation.

 

On Wednesday, Synchrony Financial (SYF), the largest provider of private label credit cards, received approval from The Federal Reserve Board to become a standalone savings and loan holding company. GE spun off the unit via an Initial Public Offering in 2014, which raised nearly $3 billion.

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And last week, GE set up a plan to offload the largest chunk of its finance business, agreeing to sell $30 billion of commercial lending assets to Wells Fargo (WFC). “We’ve signed more than $126 billion in transactions which is over 60% of our overall plan,” said Sherin in a statement on the deal. Next and last on the U.S. chopping block, Franchise Finance, which could fetch more than $5 billion, according to estimates. 

The makeover will also allow GE to potentially remove its Systematically Important Financial Institution (SIFI) label which comes with much regulatory burden that stemmed from the 2008 financial crisis. The company plans to apply to remove this designation in 2016, potentially early in the year say analysts.  

Chopping down the financial unit and re-focusing  the business on industrials is a win-win in Heymann’s view. “It is becoming a safer industrial stock on the way to becoming a growth industrial stock.” he added. He sees shares rising 14% to $32 over the next 12 months.

Also fueling growth is GE’s $16.9 billion purchase of Alstom, which could add as much as $0.10 to earnings in 2016, according to company estimates.  Heymann is also watching the proposed sale of GE’s appliance business to Electrolux, which is currently in dispute with the U.S. Department of Justice.

As GE moves to close these transactions, CEO Jeff Immelt may have a new project. Earlier this month activist investor Nelson Peltz’s Trian Fund Management disclosed a $2.5 billion stake in the company, making it Trian’s largest investment and one of GE’s top 10 shareholders. Trian was specific in stating that both Peltz and founder Ed Garden, who is also the Chief Investment Officer, have a “longstanding relationship” with Immelt, downplaying any whiff of speculation that the fund would up the pressure on GE. The fund described the stock as “undervalued and unappreciated” and predicted it could rise to $45 by 2017, which would be a 60% jump from current levels.

 

Friday investors will get a clearer picture about what’s ahead for GE and its pending transactions when the company reports earnings before the start of trading. Shares of GE have gained more than 9% this year.

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