Upside Room in this Big Conglomerate
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
General Electric (NYSE: GE) went through hard times during the last financial crisis, especially from the financial side of the business. The company had to face deep problems in GE Capital Services, and the drying up of the short term credit markets created some serious and unexpected difficulties for GE.
But the company has learned from that crisis, and the worse is clearly behind them. GE is modifying its debt policy in order to be less dependent on short term credit. Long term debt means higher financing costs, but the current environment of ultra low interest rates may be a great moment to secure cheap long term funding.
GE Capital Services is in a much better shape than before, and is showing higher profitability levels. General Electric plans to reduce the size of its financial businesses, paying more attention to the quality of the portfolio and focusing more on the areas in which the company has deep competitive advantages like middle market commercial and industrial loans, equipment leasing and some consumer markets.
Even if it never goes back to its pre-crisis size, GE Capital Services is in a strong position to capitalize on opportunities in the following years, since many competitors have dramatically reduced their operations or even left the business due to the rise in delinquencies in their commercial and residential real estate portfolios. Instead of selling the loans to other investors like most competitors do, GE Capital Services keeps those loans in its own portfolio. This means higher credit risk for the company, but it also generates bigger profit margins. Also, GE Capital Services is not so dependent on liquidity conditions in credit markets because it doesn´t need to find a counterparty to purchase its loans.
The financial arm of General Electric is more than a profitable business by itself; it helps the other business segments of the company by providing financing for all kind of products and projects. These kinds of synergies between business lines and geographies coupled with deep pockets for research and development, give GE an important advantage versus most competitors.
Over the last years GE has been adding more emphasis to businesses directly linked to the industrialization needs of emerging markets. Changing its focus as the world changes, GE has gained exposure to businesses with extraordinary long term potential like wind and gas turbines. These business areas are currently under pressure due to oversupply in many industries and tighter fiscal budgets in some countries. Over the long term, however, GE should be able to capitalize on the growth opportunities provided by these business areas.
When comparing GE with other holdings like Siemens (NYSE: SI), United Technologies (NYSE: UTX), 3M (NYSE: MMM) or Tyco (NYSE: TYC) the company looks well in terms of valuation. General electric is trading at valuation ratios which are similar to those of its competitors when looking at Forward P/E, Price to Free Cash Flow or dividend yield ratios.
In terms of profitability, GE is below 3M in both gross and operating margins, and United Technologies has higher operating margins but lower profitability at the gross margin level. Overall, GE looks well from a valuation and profitability point of view, although not dramatically undervalued in comparison to similar companies.
General Electric has improved its financial operations, and the company invested heavily in businesses related to infrastructure needs in emerging markets over the following years. The company is strongly positioned for growth in the years ahead, and has moderate valuation ratios. It looks like GE has what it takes to outperform the markets in the middle term.
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