Income from GE while you wait for turn in commodity-related industrials

04/08/2013 6:28 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

General Electric (GE), at least, thinks there’s a future in the commodities sector.

Today the company announced that it would spend part of the $16.7 billion in cash it received from selling NBC Universal to Comcast (CMCSA) to buy Lufkin Industries (LUFK) for $3.3 billion. The price is a 38% premium to the April 5 close for shares of this maker of artificial lifts that bring crude oil to the surface. The deal will double GE’s share of the artificial lift market, giving the company a 15% market share.

General Electric made $11 billion in acquisitions in the energy sector in 2010 and 2011 and this deal fits with CEO Jeff Immelt’s strategy of expanding General Electric’s industrial business while shrinking the relative importance of GE Capital.

General Electric is paying about 13.5 times estimated EBITDA for Lufkin. That’s a little rich in comparison to other recent deals in the space, but analysts think there’s a good bit of fat to cut at Lufkin and that General Electric will be able to wring about $60 million in cost savings out of the company over the next five years.

The $88.50 a share purchase price is a big increase from the pre-deal share price of $63.93, but it is roughly equal to Lufkin’s high of $85.39 back in back in February 2012.

I wouldn’t say that GE is on a buying spree but the company is clearly using the softness in commodity related stocks to do some exploratory drilling of its own. Last year, for example, General Electric made two deals in the mining equipment business, purchasing Industrea Limited and Fairchild International. The two deals moved General Electric’s revenue from mining equipment to about 1% of company revenue. Given General Electric’s oft-repeated goal of being No. 1 or No. 2 in each sector where it does business, I doubt that the company will stop with these two deals.

For investors who find the current depressed price of commodity-related stocks “interesting,” but are worried about getting in to early or about their ability to figure out which of the currently depressed companies are the best buys, shares of General Electric present an intriguing opportunity. The company clearly sees a combination of decent prices and potential growth in the sector. An investor can tag along with GE as it builds market share in the sector and collect the company’s 3.3% dividend yield as he or she waits for the turn. (General Electric is a member of my dividend income portfolio http://jubakpicks.com/  )

 

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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