Senior Portfolio Manager Todd Lowenstein of HighMark Capital Management says there are misconceptions about General Electric Company (GE) still being overly finance-exposed.
“In the past, [GE] was an empire builder, and during the financial crisis, it got exposed for being heavily reliant on short-term commercial paper financing, essentially funding short and investing long, relying on their AAA credit rating providing an advantageous funding position,” Lowenstein says.
“They spent a lot of money building a massive presence in various financial services unrelated to their core industrial business, which resulted in finance at the peak of last cycle becoming close to half their earnings power. Essentially, this wasn’t even a pure industrial company any longer; it was becoming a closet finance company capitalized as a premium industrial conglomerate. They had huge difficulties during the financial crisis when the commercial paper market froze and they weren’t able to roll over their paper,” he adds.
Lowenstein says the company has taken steps to unwind those past investments and return the focus back to its industrial heritage.
“They systematically decided to sell off most of their financial assets at pretty attractive prices and unloaded their lower-valuation, commodity-type industrial business, such as lighting and appliances, while acquiring attractive assets in areas where they have a scale presence.”
GE is now being shrunk to fit an attractive set of crown-jewel businesses, such as aircraft engines, power generation, health care and locomotive, Lowenstein says.
GE Power Generation
“They are going to take about $100 billion in capital and redeploy it in industrial acquisitions and shareholder buybacks. They are going to rake in over $100 billion in asset sales and will redeploy that capital back, investing in the industrial businesses, productivity improvements, margin expansion and shareholder returns,” he says.
“Ultimately, we think this slow-moving transformation will warrant a much higher valuation multiple, higher growth-rate potential, higher-quality earnings, and it’s going to be a very successful investment for our shareholders.”
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