Jason E. Miczek/Bloomberg News
- Ted MannThe Wall Street JournalCANCEL
April 12, 2015 7:27 p.m. ET
With a pledge to divest its mammoth banking operation over the next two years, General Electric Co.
has made the move investors have long wanted, and staked its future on jet engines, power turbines and oil services instead of finance.
Now comes yet another hard part: proving that its industrial portfolio can reliably grow.
“The future for GE is as an industrial company,” Chief Executive Jeff Immelt said this past Friday, announcing that the company will sell off virtually all of its GE Capital lending arm, retaining only those finance units that it uses to bolster its power generation, health-care and aviation businesses.
The divestitures over the next two years will mean giving up the sources of a third of the company’s profit. GE will lessen the blow to its per-share earnings by buying back $50 billion in stock, a move that will help reduce the conglomerate’s outstanding share count by 15% to 20% from 2014 through 2018.
Mr. Immelt also said the company will continue to look for $3 billion to $5 billion a year in acquisitions to bolster its industrial side.
The exit from finance is the boldest portfolio move in Mr. Immelt’s nearly 14 years at the top, a stark change that acknowledged there would be no way to break GE out of its prolonged share-price slump without letting go of financial services.
But it will leave him on the hook to deliver sales and profit growth at a time when the power-generation business remains under pressure and the collapse in oil prices threatens operations accounting for a fifth or more of the company’s industrial sales.
Friday’s share price surge for GE—an 11% single-day increase, its largest since 2009—indicates investors are hopeful, said Deane Dray, an analyst at RBC Capital Markets who has long covered the company.
“It’s not just the exit from Capital, but also a more focused industrial, and that’s what people have been asking for the whole time,” Mr. Dray said in an interview.
The next read on those businesses will come on Friday, when GE reports its financial results for the first three months of the year.
Mr. Immelt spent $14 billion acquiring oil and gas companies over the first half of the decade, and GE had been counting on that business as a driver of growth right up until the collapse of crude oil prices last fall. The price collapse has led oil producers to slash their equipment budgets, and GE has said it expects a decline in both sales and profit of up to 5% over the course of 2015.
Observers now think that estimate is “woefully understated,” Mr. Dray said. His team estimates GE’s oil and gas earnings could fall 23% this year. GE has previously projected confidence that it can ride out a dip in the oil business that executives see as a cyclical problem, not an existential one.
The results will include a $16 billion charge representing the bulk of GE’s cost for spinning off lending, Jeffrey Bornstein, the company’s chief financial officer, said this past Friday.
GE has told investors it should be able to maintain double-digit industrial earnings growth through 2018. Mr. Immelt said Friday that the decision to pull the trigger on selling out of financial services was made possible in part by moves that left the industrial side of the business more robust.
The company has invested significantly in its jet-engine business, which is beginning to ramp up manufacturing of its newest engine design. And it has been jettisoning other lines of business that don’t yield high returns, such as its appliance unit, a mainstay of the company that GE agreed to sell to Electrolux
AB for $3.3 billion last year.
The company is also working to complete its $17 billion acquisition of Alstom SA
’s power business, a deal that would be GE’s largest-ever acquisition and one GE has said will give it a broad base of installed power turbines that will spin off years of profit from lucrative maintenance and overhauls.
It is that mix of business that investors want to stake their bets on, according to Mr. Dray and other analysts: high-tech equipment that is hard for competitors to match, delivered on long cycles that provide great predictability about future sales, with the opportunity to reap service revenues for decades to come.
Industrial growth has been up. GE reported growth in industrial sales of 6% in 2014, up from 1% the year before.
One risk for GE is actually getting the Alstom deal closed. European regulators have entered a second-phase review of the acquisition, looking to ensure that GE’s purchase of a main rival doesn’t squeeze out competition in the market for power-generation equipment. Regulators have extended their review until July 8, but a GE spokesman says the company still expects to close the deal by July 1.
Other things that could go wrong include a deeper or longer-than-expected downturn in the oil industry, or a recession that holds down sales of GE’s power turbines and health-care imaging machines, forcing the company to look outside for growth.
Now that GE has pared down its operations to create a more focused industrial portfolio, Mr. Dray said, “you have to have things go right.”
Write to Ted Mann at email@example.com
Corrections & Amplifications
A previous version of this article incorrectly said GE had extended its timeline for closing the Alstom deal. The company says it can complete the deal by July 1.
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