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GE AT A GLANCE

P/E ► 12.6 AVG EV/EBITDA ► 16.7 HIGH ROA ► 3.3% AVG ROE ► 10% AVG Debt to Equity ► 5.70 VERY HIGH Current Ratio ► 2.38 AVG Interest Coverage Ratio ► 1.67 AVG

 

 

 

 

 

 

General Electric Co. (NYSE: GE) is a multinational conglomerate that manufactures large-scale industrial products, produces consumer appliances, and provides financial services. GE's operations now span the financial services, energy, industrial manufacturing, healthcare, and media industries. In 2008, GE was the twelfth-largest company in the world by revenue and the second-largest company by market capitalization.^[1] The company generated $183 billion in revenue in 2008, which has grown 13% annually on average since 2003 ^[2]. The company's earnings from continuing operations fell 47% in the second quarter of 2009 from $5.39 billion to $2.87 billion.^[3] In second quarter 2009, revenue fell 17% to $39.1 billion, falling short of average analyst expectations of $41.9 billion. This decrease was largely due to an over 40% decrease in equipment orders in the GE engine, medical imaging machine, and locomotives segments. ^[3]

GE's diversification provides the company with a degree of protection against poor performance in any business segment. For example, in Q2 2009, GE Infrastructure net income rose 13%, compared to declines of 11%, 41%, and 79% in the Technology Infrastructure, NBC Universal, and GE Capital segments, respectively.^[3] Additionally, GE's size enables it to buy and sell companies at opportune times, taking advantage of favorable market conditions. For example, in December 2008 GE Money sold its Wizard Home Loans brands along with $4 billion in mortgage debt to Aussie Home Loans in an effort to withdraw from the residential mortgage business and limit the company's exposure to the housing crisis. ^[4]

The 2008 Financial Crisis has had a sizable affect on GE, since the company usually generates half of its profits from GE Capital Services.^[5] In 2008, the company planned for a loss of $6.6 billion and expects losses to rise further to $7.5 to $9.0 billion in 2009.^[5] Furthermore, GE Money reported its assets were valued at $185 billion, down 12% from the previous year.^[6] On March 12, 2009, S&P downgraded GE to a "AA+" credit rating from its long-held "AAA" rating, citing increased uncertainty relating to GE Capital.^[7] GE Capital Services has continued to detract from GE's overall earnings. In the third quarter of 2009, net income fell by 42% to $2.49 billion, fed by a $997 million pretax loss from GE Capital Services.^[8] Analysts had expected a $275 million loss. ^[8] Overall revenue for the quarter fell 20% to $37.8 billion. ^[9]

On July 22, 2009, GE received permission from the FDIC to begin exiting the Temporary Liquidity Guarantee Program (TLGP), allowing GE Capital Corporation to issue non-guaranteed commercial debt with maturities up to 3 years. ^[10] It is still participating in the Fed's Term Asset-Backed Securities Loan Facility (TALF) program, which provides loans to investors towards the purchase of top-rated securities. In August 2009, the company announced it plans to issue another $618 in debt under TALF. ^[11]

Company Overview

General Electric is a large conglomerate composed of six distinct divisions.

• GE Technology Infrastructure (25% of revenue)^[12] develops technologies for transportation infrastructures. This segment includes GE Aviation, which produces and sells jet engines and other parts for military and commercial aircraft. GE Transportation provides technological parts, such as locomotives and engines, to the railroad, marine, and transit industries.^[13] GE Water manufactures pumps, filters, and other equipment needed in water treatment and desalination systems. ^[13]
• GE Healthcare ^[14] offers healthcare and medical-related services and goods. The division manufactures and services a range of medical equipment including CT, PET, MRI, nuclear, and X-ray imaging systems. GE Healthcare's customers include hospitals, medical facilities, pharmaceutical and biotechnology companies, and the life science research market worldwide.
• GE Energy Infrastructure (21% of revenue)^[15] This segment manufactures equipment for energy companies. GE Energy sells energy technologies such as gas turbines, generators, and steam turbines to power companies and industrial plants.^[16] GE Oil and Gas supplies equipment such as drilling systems, floating production platforms, compressors, and turbines for the oil and natural gas industry.
• NBC Universal (9.0% of Revenue)^[17] is one of the four major US broadcast networks and a motion picture studio. The unit includes a portfolio of news and entertainment networks, a motion picture production company, television production operations, and a group of theme parks. GE owns 80% of NBC Universal; Vivendi S.A. owns the remaining 20%, though sources say Vivendi will sell its share by the end of 2009.^[18] The division's cable/television network includes USA, Bravo, CNBC, the SciFi Channel, MSNBC, Oxygen, the Sundance Channel, UniHD, and others. NBC has exclusive rights to the 2010 and 2012 Olympic Games, NFL Sunday Night Football, and Super Bowl 2009 and 2012. ^[17] CEO Jeffrey Immelt is considering a reduced stake in NBC Universal as he focuses on energy, transportation, and healthcare businesses. ^[8]
• GE Capital Finance (37% of revenue) This unit is the umbrella group for all of GE's financial services, and has suffered the most from the 2008 Financial Crisis. The division offers loans and leases for customers needing capital to construct new facilities, purchase new equipment, or acquire new real estate. GE Commercial Finance services the construction, manufacturing, transportation, telecommunications, and healthcare industries. ^[19] GE Money (14.5% of Revenue)^[20] provides consumer banking and credit services, including credit cards, personal loans, bank cards, auto loans, debt consolidation, and home equity loans. GE Money sold its US mortgage business (WMC) in December 2007 as a result of the subprime lending crisis.
• GE Consumer & Industrial (11.7% of revenue)^[21] produces and sells consumer appliances, industrial equipment, and related services. GE Consumer & Industrial manufactures products such as home appliances, industrial equipment, and lighting. GE Enterprise Solutions offers security systems, plant automation, and other large-scale solutions needed by industry.

2008 Revenue by Segment (US$ billions) ^[22]

General Electric Revenue and Income. ^[23][24][25]

Trends and Forces

Maintaining flexibility through acquisitions

As a large conglomerate with substantial purchasing power, General Electric employs a strategy of acquiring and selling off companies to maximize revenues at any given time. By using this strategy to enter and exit various industries, GE adjusts its portfolio of offerings in order to take advantage of profitable conditions in any one market or industry. For example, improved fuel efficiency in airplane engines has reduced commercial airlines' operating costs, allowing them to expand their fleet of airplanes. GE has responded to this trend by expanding further into the engine production and airplane leasing businesses, delivering 3030 engines in 2008 compared to 2600 in 2007 with a backlog of 9400 engines as of January 2009.^[26] Some notable acquisitions in the past several years include:

• NBC Universal
  • In July 2008, NBC Universal announced plans to acquire The Weather Channel for $3.5 billion.^[27] The Weather Channel is the third most popular cable television station, as 97% of cable subscribers have The Weather Channel. ^[27]
• Healthcare
  • GE's acquisitions of Amersham in 2004 and IDX Systems in 2006, which manufacture products used in health care, have helped expand GE's presence in the industry.^{[28] [29]} Revenues for GE's healthcare segment have since increased from $15.0 billion in 2005 to $17.0 billion in 2007. ^[22]
• Plastic business
  • GE Supply and Advanced Materials was sold to offset the losses resulting from the price inflation of raw materials, natural gas, and benzene. GE is now reportedly discussing the sale of its plastic business to Saudi Basic Industries Corporation (SABIC) for $11 billion. ^[30] Unpredictable commodities prices have made it difficult for GE to achieve predicted earnings, driving the company to sell its plastic business. SABIC is 70% owned by the Saudi government, however, which could politicize the issue and present an obstacle to closing the deal. ^[31]
• Insurance
  • GE has been selling off its insurance businesses in order to concentrate on expanding its other divisions' presence in emerging markets. With the sales of GE Life, GE Insurance Solutions, and Genworth, the company completely exited the insurance business in 2006.^[32]

GE Revenue % by Region^[33]

Focus on International Growth

GE has been greatly expanding its presence across the world, particularly in emerging markets. International markets often provide higher growth potential, driving GE's push into new geographic regions. One particular area with high potential for international growth is cable and television programming, where GE operates 15 cable and satellite brands operating in over 100 countries.^[34] Management hopes to double its cable revenue to $500 million. ^[34] In October 2009, CEO Jeffrey Immelt said the company may double revenues from India to $6 billion in the next 3-4 years. ^[35]

Though global expansion offers the possibility for higher revenue growth, there are also some risks involved. Laws and regulations, which differ from country to country, can significantly impact GE's performance. For example, in December of 2006, Japan passed a law that lowered the maximum interest rate lenders (such as GE) can charge and put limits on consumer borrowing.^[36] These difficulties lead GE to sell its consumer finance operations in Japan to Shinsei Bank for $5.4 billion in July 2008 and exit consumer finance in Japan altogether.^[37]

Sensitivity to U.S. dollar

GE does the majority of its business outside of the U.S., earning its revenue in a variety of different currencies. As a U.S.-based company, however, GE's revenue is reported in U.S. dollars. Fluctuations in the dollar's exchange rates can substantially increase or decrease GE's revenues (as reported in USD). In 2007, GE Money reported a $1.4 billion increase in revenue and GE Commercial Finance reported a $1.0 billion revenue increase due to the weaker US dollar.^[38]

In general, a weakening of the US dollar is beneficial for GE's international operations. As the value of the dollar falls, any given amount of foreign currency converts to a larger number of USD (in nominal terms). Since its revenues are counted in USD, this can boost GE's revenues. If the dollar's value increases, however, income in other currencies yields fewer USD, which can negatively impact GE's revenues.

2008 Financial Crisis

GE is one of the largest issuers of commercial paper - short term financing in the money markets - with $88 billion outstanding as of October 2008. ^[5] On March 12, 2009, S&P downgraded GE to a "AA+" credit rating from its long-held "AAA" rating, citing increased uncertainty relating to GE Capital.^[7] Morningstar analysts predict that GE will have to put up an additional $15-$20 billion as additional collateral in the event its credit rating is downgraded. ^[39] However, GE is still one of the only financial services firms that holds a "AA+" rating and has a "stable" outlook from S&P. ^[7] Along with interbank lending, the commercial paper market has also seized up with the 2008 credit crunch. As a result, the company has shifted its funding strategy from commercial paper to outside deposits. ^[39]

In addition, GE generates roughly half of its profits from GE Capital, which invests in a wide variety of assets including real estate, credit cards, and mortgages. GE itself anticipates asset losses of $6.6 billion on GE Capital for 2008, rising to $7.5-$9 billion in 2009. ^[5]

In a very public show of confidence, the famed investor Warren Buffet invested $3 billion in GE stock in October 2008. ^[40] The following week, GE sold $12 billion in shares to the public to shore up capital. ^[5] Unfortunately, GE per share earnings have been impacted by the financial crisis as they dropped from $2.20 per share in 2007 to an estimated $1.04 per share in 2009. The share price has gone from $21.50 when Buffet invested to below $10 in April 2009. It has since recovered but still remains well below it's Oct 2008 price. GE was also forced to cut it's dividend by more than 50%, from $1.24 per share to 40 cents per share. Until earnings begin a recovery and GE feels comfortable enough to increase it's dividend, the share price will have difficulty in moving higher.

Growth through Acquisition and Sales of Underperforming Units

In May 2008, GE announced plans to seek a buyer for its large appliances division, which makes such things as washing machines and refrigerators.^[41] By summer 2008 GE revised its plans to instead spin-off the appliances division, valued at $4 to $8 billion,^[42] to shareholders as a independent company. This unit accounted for 4.2% ($7.2 billion) of GE's 2007 revenue.^[42] This is part of an ongoing process under CEO Immelt to sell off product lines with limited growth potential, which so far has included the sale of GE's private label credit card and the company's consumer finance unit in Japan, and refocus on areas of potentially higher growth, such as water treatment or aviation. ^[43] In December 2008 GE Money sold its Wizard Home Loans brands along with $4 billion in mortgage debt to Aussie Home Loans in an effort to withdraw from the residential mortgage business and limit the company's exposure to the housing crisis. ^[4]

Environmental Leadership

In May 2005 GE announced the launch of a "Ecomagination" program intended to develop tomorrow’s solutions such as solar energy, hybrid locomotives, fuel cells, lower-emission aircraft engines, lighter and stronger durable materials, efficient lighting, and water purification technology.^[44] On December 28, 2008, new GE Energy Smart CFL lightbulbs, 15-watt energy-saving bulbs that look and function exactly like their 60-watt incandescent counterparts, will debut in Target stores.^[45] The bulbs are rated 8000 hours and guaranteed for five years. Between April and June 2009, GE plans to introduce 9-watt and 20-watt incandescent-shaped equivalents of 40-watt and 70-watt bulbs, respectively.^[45] The company's increased emphasis on clean technology is an aggressive initiative to bring new technologies help consumers meet pressing environmental challenges. ^[45]

Competition

GE vs. Siemens, 2004-2006

GE competes against a number of other companies, but most of them are more specialized, focusing in one industry. GE's operations, on the other hand, are spread across many different industries, limiting its exposure to competition from any one company.

Of GE's competitors, Siemens AG (SI) is the most significant. Siemens operates in a number of different industries, many of which it shares with GE. In fact, NBC Universal is the only of GE's six divisions that Siemens does not directly compete with. Despite GE's size advantage, however, Siemens is still a very large company in its own right, and it's the only company that effectively competes against GE in nearly all of its main industries.

Studio Market Share

Gross revenue in 2008 was $9.63B for the studio industry as a whole^[50].

Notes: 1. GE owns 80% of NBC Universal Studios. ^[51]

2. In January 2009, GE's Universal Studios sold Rogue Pictures to Relativity Media LLC. ^[52]

References

1. ↑ Fortune Global 500
2. ↑ GE 2007 Annual Report, page 2
3. ↑ ^{3.0 3.1 3.2} Bloomberg, "GE Falls Most Since April as Sales Miss Estimates "
4. ↑ ^{4.0 4.1} AAP Aussie Home Loans buys Wizard from GE Money Australia, Commonwealth Bank to buy $4bn in mortgages
5. ↑ ^{5.0 5.1 5.2 5.3 5.4} New York Times, "Finance Arm Weights on GE"
6. ↑ Seeking Alpha, Four Key Points from GE's Q408 Conference Call
7. ↑ ^{7.0 7.1 7.2} General Electric downgraded by S&P
8. ↑ ^{8.0 8.1 8.2} Boston Globe, "Losses at finance unit slice GE earnings; stock tumbles"
9. ↑ Reuters "Weak sales drag GE shares"
10. ↑ GE Press release
11. ↑ Bloomberg "Ford, Discover, GE Plan Debt Sales for TALF"
12. ↑ GE 2007 10-K, Item 1 "Business," page 4
13. ↑ ^{13.0 13.1} GE 2007 10-K, Item 1 "Business," page 7
14. ↑ GE 2007 10-K, Item 1 "Business," page 10
15. ↑
16. ↑ GE 2007 10-K, Item 1 "Business," page 6
17. ↑ ^{17.0 17.1} GE 2007 10-K, Item 1 "Business," page 11
18. ↑ Reuters "Vivendi likely to sell NBC Universal stake: report"
19. ↑
20. ↑ GE 2007 10-K, Item 1 "Business," page 9
21. ↑ GE 2007 10-K, Item 1 "Business," page 13
22. ↑ ^{22.0 22.1} GE 2008 Annual Report, Note 27 to Consolidated Financial Statements, page 90
23. ↑ GE 2007 Annual Report, "Statement of Earnings," page 64
24. ↑ GE 2007 Annual Report, page 2
25. ↑ GE 2004 Annual Report, "Earnings"
26. ↑ GE engine production up, orders down in ‘08
27. ↑ ^{27.0 27.1} Weather Channel Sold to NBC for about 3.5 billion
28. ↑ GE completes Amersham acquisition
29. ↑ GE Healthcare Completes Acquisition of IDX Systems Corporation
30. ↑ GE Nears Deal in Plastics Auction
31. ↑ SAUDI ARABIA - The SABIC Perspective.
32. ↑ New York Times, "G.E. Completes Its Exit From Insurance Industry"
33. ↑ GE 2007 Annual Report, page 51
34. ↑ ^{34.0 34.1} GE 2007 Annual Report, Letter to Investors, page 6
35. ↑ Bloomberg "GE’s Immelt Says Emerging Markets ‘Doing Very Well’"
36. ↑ MarketWatch, GE Consumer Finance latest casualty of Japanese crackdown
37. ↑ International Herald Tribune, "GE to sell Japanese consumer finance unit to Shinsei Bank"
38. ↑ GE 2007 Annual Report, Management's Discussion, page 49
39. ↑ ^{39.0 39.1} Morningstar Analyst Report, GE
40. ↑ MSNBC US Business "Warren Buffet invests $3 billion in GE"
41. ↑ Bloomberg, GE Plans to Seek Buyers for Appliance Operations, Journal Says
42. ↑ ^{42.0 42.1} Reuters, LG Elec watching GE appliance unit sale plans: CEO
43. ↑ Morningstar analyst report, 24 Nov 2008
44. ↑ New York Times, "It's Getting Crowded on the Environmental Bandwagon"
45. ↑ ^{45.0 45.1 45.2} MarketWatch "ADDING MULTIMEDIA GE Debuts World's First Truly Incandescent-Shaped Energy Smart(R) CFL Bulb"
46. ↑ Google Finance, GE
47. ↑ ^{47.0 47.1} Thomson Reuters, GE
48. ↑ Google Finance SIE
49. ↑ Thomson Reuters SI.N
50. ↑ Box Office Mojo: Studio Market Share.
51. ↑ GE "NBC Universal Fact Sheet"
52. ↑ WSJ, GE's Universal Sells Rogue in Shift for Specialty Films