GE: Growth in Energy?
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
General Electric’s (NYSE: GE) decision to ditch its stake in NBC last year is already paying strong dividends for them. Buried in a first quarter earnings report where year-on-year revenue and earnings were down, they were still better than expected. Assets that were allocated to NBC were shifted to their Oil and Gas operations which have since grown 64% over the two-year redeployment.
GE has re-dedicated themselves, somewhat, to the production of energy, shocking given the name of the company I know. But, all kidding aside, energy production and distribution represents an enormous opportunity for any established player because of the scale of the growth that is happening around the world, especially in the emerging markets of Southeast Asia. GE saw equipment order growth of 29% and emerging market order growth was 24%. GE’s Industrial division in China alone now represents 9% of their total business, booking $4.9 billion in sales and the company is looking for 15% growth across all verticals.
Organic Growth for Energy
A recent report by Deliotte highlighted that they felt the best approach to business growth in China was to integrate themselves into the local economy, investing directly in the communities, vs. either joint ventures with existing Chinese firms or getting involved in M&A activity.
This is why companies like Intel, Coke and GM will do very well in China the same way that Japanese car makers expanded in the U.S., by working with the local economy and tying them to the success or failure of the brand.
GE gets this, having invested more than $2 billion in China over the past three years including two innovation (R&D) centers in Chengdu and Xi’an. With foreign investment falling in the past few months alongside China’s slowing economy those that continue to invest while the Chinese economy adjusts to the latest 5 year plan.
That said, GE is not above forming a joint venture or two. And it is their $535 million, 15% in China XD, one of the largest primary equipment manufacturers. Their 59/41% joint venture combines China XD’s large transformers and breakers with GE’s expertise in electricity distribution to improve electricity transmission locally.
Value, Growth or Both?
GE, trading at a P/E of 15 with a dividend yield that is likely to rise to $0.80 or 4.2% gives an investor exposure to China at an effective yield of 10.5%. The most aggressive long-term growth plan for China at this point is 7%, so GE is certainly trading at a discount to their emerging market growth and an excellent opportunity to play the Southeast Asian growth story along with a passive instrument like the iShares MSCI China 25 Index ETF (NYSEMKT: FXI) that takes its cues from a Shanghai Index currently trading at a P/E of 10. Viewed through that lens GE represents both good value and an opportunity for solid growth.
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