GE's collection of late-cycle businesses is poised for growth over the next several quarters as capital goods orders materialize into shipments. In addition, we think GE's position on next-generation, narrow-body aircraft sets the stage for healthy profitability over the next several years. Through acquisitions, it is clear that the revamped General Electric will focus more heavily on oil and gas power generation, including renewable energy.
In a move repeated by many of the diversified manufacturers that Morningstar covers, GE shifted its growth focus from acquisitions to heavy research and development, giving it one of the strongest new product portfolios in recent memory. The management team has done a noble job shrinking the size of the business while maintaining the long-term earnings integrity of GE Capital. The company has signaled intentions to return cash to shareholders, a welcome move, in our opinion.
|Economic Moat||Fair value||Stewardship Rating|
Industrie - industriële producten
KEY INVESTMENT CONSIDERATIONS
- In May 2012, General Electric announced the resumption of the dividend from GE Capital to the parent company after a three-and-a-half-year suspension. Management has signaled that it intends to raise the dividend in line with earnings and repurchase shares with excess cash.
- While GE should have ample flexibility with its capital structure, we anticipate it keeping acquisitions small, focusing on infrastructure.
- Emerging-market demand is a huge consideration for GE. With domestic markets likely to be depressed for some time, GE's near-term success is heavily linked to the growth of these economies.
- A number of GE Capital's competitors are struggling or have already exited the market because of the rise in delinquencies in residential and commercial real estate, leaving a less crowded competitive landscape for GE.
- The disposition of the remaining stake in Comcast boosts GE's cash position and allows the infrastructure businesses to receive more capital and management attention.
- GE's global presence allows access to more information about the direction of economic activity than other firms, giving the company an advantage in getting its feet on the ground in emerging economies.
- Efficient manufacturing programs like Six Sigma and lean manufacturing have been around long enough for other firms to successfully implement and catch up to GE, reducing the strength of GE's cost advantage.
- By shifting to long-term financing, GE is opting for more expensive financing, which will pressure GE Capital's profitability.
- GE's earnings may become more cyclical with the departure of NBC Universal and the shrinking weight of lighting and appliances in the portfolio. The market typically places a premium on more-stable earnings bases.
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