General Electric: "The "Super-Jupiter"

05/05/2017 2:50 am EST

Focus: INDUSTRIALS

Benj Gallander

President, Contra the Heard

We like to think of General Electric (GE) as the super-Jupiter in our model portfolio; at $260 billion, was have never owned a holding with a larger market cap, explains Benj Gallander, editor of Contra the Heard.

The Romans, Greeks and Babylonians may have deified the planet Jupiter, but we have more earthly considerations for our position in GE. We like what Immelt is doing with the company well enough to think that he will hit most of his targets and that the stock will follow.

We remain impressed with the way that CEO Jeffrey Immelt has dealt with the pressure of trying to execute his corporate transition. But some bears are growling louder that his 15-year tenure is in extra innings and it’s time to call to the bullpen for a younger arm.

One of the disgruntled is the 13th-largest shareholder, Trian Fund Management, an activist investing firm that owns $2 billion worth of stock. It recently struck a deal with GE to reward senior management if new performance targets are met, but also to penalize them if they fail.

Immelt’s compensation actually dropped by 35 percent in 2016 for not hitting benchmarks. As a direct result of Trian’s prodding, GE set an earnings goal of $2 a share by 2018 and aimed to cut structural costs in its manufacturing businesses by $1 billion this year and $22.9 billion next year.

That sounds like there will be sizable layoffs. Trian did not offer any opinion on how long Immelt might survive if these goals aren’t met. Failure to perform could mean Immelt getting yanked from the roster.

One area in which even Immelt may admit his decision making was poor was resources. The oil and gas segment has been weak for years due to low oil prices and kept manufacturing profits flat in 2016.

In the latest quarter, segment revenues were down again by 22 percent. During Q4, GE announced it would merge its oil and gas business with Baker Hughes (BHI) and then spin it off. The idea is to put a halt to diminishing sales and create a mix of service and equipment capabilities.

GE also completed the sale of GE Money Bank, its French consumer-finance business and the last major asset of GE Capital, to an affiliate of Cerberus Capital Management. The amount wasn’t disclosed, but the complete divestiture of this unit was wrapped up a year ahead of schedule.

In Q4, GE announced it would be selling its water and industrial solutions businesses. These sales are expected to close in 2017 and generate a combined $4 billion.

Through purchases of two European companies, GE is exposed to the 3D printing and additive manufacturing space, which is expected to hit $1 billion in sales by 2020.

GE is also investing in industrial services, with their high profit margin of around 30 percent. The backlog continues to be impressive, as it grew to $321 billion in 2016.

The new Trump administration could play a recurring role in GE’s progress. It has vowed to lower U.S. corporate tax rates to 15 percent from 35 percent and create a flat 10 percent repatriation tax for U.S. multinationals like GE that hold profits overseas.

CEO Immelt would likely approve of these moves but recently got into the mix by urging the new president to keep things cool with China. He said the trade relationship is essential and he promoted globalization as beneficial to the U.S.

In 2016, GE returned more than $30 billion to shareholders in dividends and buybacks and we were happy to collect our share. We’re banking on more to come.

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