Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

General Electric is giving investors more of what they want. In return, investors are giving it more credit.

Shares of the $306 billion company founded by Thomas Edison hit a milestone last week when they crossed $30 for the first time since before the collapse of Lehman Brothers. For a company considered one of the strongest industrial concerns, GE was one of the last among U.S. or European peers to return to its pre-crisis range. 

The Slow Crawl
GE is one of the last big industrials to get back to '08 levels, but investors are finally giving it more credit
Source: Bloomberg

Why did it take so long? It's easy to point to GE Capital, with its multitude of financial entanglements and too-big-to-fail designation. But even before the credit crunch, GE was underperforming. It was just too big and too complex for all of its operations to be doing well at the same time. (It once owned a big chunk of Dreyer's Grand Ice Cream, for heaven's sake.) There was usually something bad mixed in with the good, so GE shares dropped after quarterly earnings more often than they gained in the last decade. 

Much has been made of CEO Jeff Immelt's decision to part with $200 billion of GE Capital assets in April -- although even then, excitement was muted until Nelson Peltz gave his endorsement. And it was a big step, but it was still only a part of a larger slimming-down process. In the meantime, GE has been strengthening its industrial core, and the results are now shining through more clearly. 

Especially in the last few years, margins at its industrial division have been widening and profits have been growing, apart from oil and gas. In its aviation business, General Electric has higher margins than Honeywell -- the industrial company that always gets so much applause for cost cuts and profitability. It's also been striking deals while others let cash pile up. 

Take its purchase of Alstom's energy operations. Critics say the acquisition was poorly timed, announced just a few months before oil prices began their slump last year. But there's a lot to like. The gas-turbine maker's mature business has pretty dismal margins, but that just means there's more fat for GE to cut. And there's a huge opportunity for GE to sell more Alstom parts and services for already-installed equipment. More importantly, GE didn't overpay for Alstom. Siemens can't say the same for its purchase this year of oilfield equipment maker Dresser-Rand. 

GE's own pricey acquisition of fellow equipment maker Lufkin in 2013 is harder to defend, and its substantial energy business will still have its work cut out for it in trying to navigate the depressed oil environment. Still, revenue from its power and water business as well as aviation is helping to cushion the blow. 

Thanks to the GE Capital wind-down, the company has got plenty of firepower to jump on any bargains. The assets that Baker Hughes and Halliburton plan to divest to get their merger approved are one possibility. Acquisitions abound in other areas as well, from Pentair to Bio-Rad Laboratories.

GE does have an activist investor in the aforementioned Peltz, but his prescription is essentially to keep doing what it's doing. Peltz isn't usually that warm and fuzzy with the companies he targets. Just ask DuPont. GE probably escapes any wrath because it's largely been its own activist.

From Conglomerate to Industrial
Cutting ties with GE Capital is just the latest -- and biggest -- step in the slimming process
Source: Bloomberg

Immelt has been selling off chunks of GE since he took over as CEO in 2001. Before Lehman's collapse, he had sold more than $60 billion in businesses -- mostly, but not only, in finance. And the selling continued: NBCUniversal is gone, and the appliances business is earmarked for sale as well (if not to Electrolux, then to another buyer). Some say the bigger split of GE Capital took too long and there's undeniably some truth to that. But it's no small feat to sell billions in finance operations and GE is doing it at a breakneck pace for good valuations that probably wouldn't have been possible if it had attempted a bigger wind-down years ago.

Whatever Immelt does next, investors should give him the benefit of the doubt.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net