Friday, 16 October 2015

General Electric: simplification excellence

As I noted earlier today when discussing the numbers of the Swedish industrial bellweather SKF life is not easy out there...and you can see this macroeconomic/exogenous element on a longer-cycle business like General Electric today for example in the shifting of the order book (even if they believe that the strong backlog indicates that it will improve)...

...or the mixed underlying pricing trends:

However margin execution remains strong and they believe (despite it being the tenth successive quarterly margin increase) that this can continue: 

Such is the benefit of a simplification drive.  But this is just the start of the change that is sweeping GE driven by the substantial asset reduction at GE Capital.  This slide excerpt hints at the continuing range of 'portfolio actions' which - in combination - make the company proportionately much more industrial/related focused with a much reduced influence of GE Capital and related.  

Not only has the company blazed through its FY15 US$100bn asset reduction target as noted above but the above initiatives including a Synchrony Financial separation gives a mega return potential of around US$20bn - no wonder the company can make the exciting observation that it 'expects to retire 6-7% of GE float by mid-November'.  Wow.

Putting the margin drive and financial simplification together and the company 'meets or beats' all if key performance indicators.  Impressive stuff.  I am particularly struck by over 10% of market cap under the 'cash returned to investors' headline.

So how to value GE? Take off the above-mentioned US$30bn of cash returned to investors and you get a market cap of just over US$250bn.  Industrial could generate US$14bn+ in profitability which at a x12 multiple equates to worth of around US$170bn.  With US$171bn worth of GE Capital assets left even placing these at half the multiples achieved so far on sales (so x0.7 TBV versus x1.4) suggests potential value of over US$100bn.  There still is around 10%  upside to the early US$30s.  Of course the recent activist commentary by Trian suggests there is much more than this (based around higher values for the Industrial unit where my numbers are more conservative). 

Net net I am still a believer in a US$30+ GE share price and will review my holding only at a share price above this level.  

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