On April 10, General Electric Company (NYSE:GE) announced bold restructuring plans to sell most of its capital assets in an effort to focus on its industrial business. GE expects to earn $35 billion through the scheme and will have the potential to return more than $90 billion to investors through 2018. GE estimates that GE Capital will shrink from 42% of earnings in 2014 to less than 10% in 2018.
GE, one of America’s largest and oldest corporations, plans to sell the bulk of its real estate portfolio to Blackstone and Wells Fargo for $26.5 billion. However, GE is keeping their “vertical” financing businesses that directly impacts its core industrial business, such as its Capital Aviation Services, Energy Financial Services, and Healthcare Equipment Finance.
GE’s plan to capitalize on its industrial business is seen as a lingering effect of the 2008 financial crisis. Since GE is such a large corporation, it became subject to strict regulations following financial reforms. The company announced, “The business model for large, wholesale-funded financial companies has changed, making it increasingly difficult to generate acceptable returns going forward.” Consequently, GE is shrinking and dismantling the riskier aspects of its business.
As GE pivots to create a “simpler, more valuable industrial company” by selling most of their capital assets, GE is refocusing on continued investment and growth. CEO Jeff Immelt said, “This is a major step in our strategy to focus GE around its competitive advantages… [GE’s businesses] are well-positioned in growth markets and are delivering superior customer outcomes, while achieving higher margins. They will be paired with a smaller GE Capital, whose businesses are aligned with GE’s industrial growth.”
The company assured that GE’s industrial business remains on track to post earnings in-line with expectations of $1.10 to $1.20 in 2015. GE will be releasing first quarter 2015 earnings on Friday, April 17 before market open.
On April 10, analyst Jim Corridore maintained a Buy rating on the stock and raised his price target from $31 to $34.Corridore expects the transition “to unlock a higher valuation for GE… This sale de-risks the company, takes away unproductive assets that have been earning 1% interest over the last 10 years and allows them to take the cash from these deals and focus on shareholder paybacks and higher growth businesses.” He remarked that GE is selling “attractive assets,” but they “just don’t generate the types of returns that GE’s other businesses generate.”
Jim Corridore has a 66% overall success rate recommending stocks with a +16.8% average return per recommendation.
Separately on April 13, analyst Julian Mitchell of Credit Suisse maintained an Outperform rating on GE and raised his price target from $29 to $31. Regarding GE’s announcement to restructure, Mitchell noted “The announcement of a dramatic shrinkage… came sooner than expected. After the share price jump, the obvious argument to make is that the stock will now go back to sleep for a while; however, we still see upside potential.”
Julian Mitchell has a 78% overall success rate recommending stocks with a +12.9% average return per recommendation.
Overall, the top analyst consensus for GE on TipRanks is Moderate Buy.