2 Conglomerates Focused on Sensible Acquisitions

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In modern decades, Wall Street has moved away from encouraging their clients to "scale up" into unrelated areas. Even still, there are a few large conglomerates out there that are praised for their diversification. The question now turns to how firms like GE and 3M can complement their core businesses without recklessly expanding in a way where the return on invested capital fails to exceed the weighted average cost of capital. Below, I review GE and 3M with this question in mind.

How General Electric (NYSE: GE) Is Creating Value

General Electric, commonly known as "GE," is an American conglomerate that is focused largely on technology, energy, and healthcare. The company put some $800 million into manufacturing in the US, and it is now focused on the so-called "Industrial Internet." This refers to a secular shift towards greater efficiency, and GE is trying to stay ahead of the curve by developing products that boost business efficiency.

In addition to targeting the "Industrial Internet," GE is looking to complement existing businesses as opposed to relentlessly attaching unrelated businesses. The most significant acquisitions made by GE really started in 1989 when it acquired RCA. In 2012, GE acquired bank deposits worth $7 billion from Metlife. GE has also recently acquired Avio, an Italian company that manufactures propulsion parts for aircraft at $4.3 billion. Purchasing Avio has opened up exposure to the European market in engine programs. In 2011, Avio reported revenues of €2 billion and pre-tax earnings of €348 million, which was a 13% increase compared to the previous year. Out of this, 83% came from the sale of engines and 15% from the sale of space propulsion parts. Avio has a presence in four continents and has more than 5,000 employees.

There is now buzz that GE is planning to buy Weatherford (NYSE: WFT), but nothing has been officially confirmed. I believe this would add meaningfully to the company's energy portfolio. Weatherford has a huge global presence, and its shares are not expensive at 1.1x book value. As an oilfield service provider, Weatherford competes against larger competitors like Halliburton and Schlumberger. It stands out in that it is recovering from negative territory, but, if GE were to take it over, consumers may be more willing to contract with Weatherford by leveraging GE's additional resources and know-how.

Meanwhile, GE has gotten a lot of attention for its focus on alternative energy. The company recently entered into a contract to supply wind turbines with Renova Energia, a Brazilian-based wind energy company. The deal sets GE  to supply 230 wind turbines worth $394 million. GE has been supplying turbines globally but demand has been on the decline.

Why You Should Be Optimistic About 3M (NYSE: MMM)

With over 55 thousand products and nearly $30 billion in sales, 3M carries a wide economic moat. 3M has a market value of $59 billion, $3.7 billion in cash and $5.2 billion in debt. In the last 50 years, the company has experienced a continued increase in dividends, and this trend is expected to persist. Its potential for future growth is evident from the current spending on R&D, which has gone up 13.9% over the last five years. Spending on innovation has been complemented by a 15.3% rise in free cash flow over the same time period.

Going forward, management, like GE's, is considering strategic acquisition as a method of expanding. This strategy has won over many on the Street: 3M has become increasingly popular and was ranked in the Top Ten of preferred stocks for 2013 by Bank of America. This comes despite a revenue miss of $130 million in the third quarter and a slight earnings miss.

3M trades at a respective 15.4x and 14x past and forward earnings. It is forecasted for 10.6% annual EPS growth over the next five years. Assuming expectations are met, 2016 EPS will come out to $9.27. At a multiple of 15.5x, this translates to a future stock value of $143.69. This provides for 12.3% average annual returns when you factor in dividend distributions. Considering that 3M has 12% lower volatility than the broader market, this merits an investment. In addition, if you are bullish on the broader macro trends, especially in technology, 3M will track the economy and save you taxable gains in a "buy-and-hold" strategy.


TakeoverAnalyst has no position in any stocks mentioned. The Motley Fool recommends 3M Company. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.

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