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  GE lights up

BENJ GALLANDER and BEN STADELMANN

Friday, July 19, 2013

How many Phillips' employees does it take to change a light bulb? Two, one to change it and one to say how much better it is than a General Electric. That is one of the gems from Todd Vercoe's book, Light Bulb 101. If you ever become frustrated replacing your incandescent, this is a place to escape to make light of your work. No pun intended of course. This leads to that huge conglomerate, General Electric, acquired in 2010 for $15.56 a share and written about in this column three years ago when trading at $16.50. Unfortunately, that was far above the mindboggling bottom of $6.53 touched at the Mariana Trench of the crisis in March, 2009, but 45 percent below where the company is currently trading at around $24.

GE has come a long way since the fall of 2008 when Warren Buffett reinforced the besieged company with $3 billion in crisis aversion capital. Since those depths of the Great Recession, the company has refocused and again resembles the famed and innovative American industrial and manufacturing powerhouse that was written about and admired by MBA professors, investors, and business journals throughout most of the 20th century.

In the most recent quarter, year-on-year revenue was flat, but net income increased 16 percent and the balance sheet also looked good with cash increasing 7 percent and total debt declining 13 percent. Those were mighty impressive numbers, especially considering the strong headwinds GE faced in Europe. A key metric going forward is the company's backlog, currently at a record $216 billion.

In the past six months, GE bolstered its already large and multifaceted footprint within the energy equipment and services space, mainly through bolt-on acquisitions. In April, the company announced its intention to acquire Texas-based Lufkin Industries for $3.3 billion, a deal that shareholders recently approved. Lufkin is a globally diversified, vertically integrated manufacturing and service enterprise with a rich history dating back to 1902. The company designs, manufactures and services artificial lift technology for the oilfields industry, and industrial gearboxes and bearings for a variety of applications in the power transmission sector. Their oilfield technologies and products have been essential to the American unconventional oil and gas boom, and should integrate nicely into GE Oil & Gas.

Further expanding its presence in the energy space, last month GE completed its acquisition of Salof Companies. Salof designs and manufactures small-scale liquefied natural gas (LNG) technologies. This will expand GE's capability and expertise in the LNG space, which has seen growing demand in the wake of shale natural gas discoveries in North America, as well as the growing applications of this form of energy in power generation and transportation.

Meanwhile in the realm of internal transactions, GE Capital announced plans to pay the parent company $6.5 billion over the course of 2013, which is consistent with GE's goals to reduce the overall size of the former, and to return capital to the papa bear. Might this mean a further increase in the dividend for shareholders? Having been slashed to a thin dime per quarter from $0.31 during the downturn, a boost from the current $0.19 seems likely. If it happens, that should bolster the share price.

The initial sell target on GE is $35.24, so from this angle, it appears there remains lots of upside. That is far below the stock's height of better than $57, where it traded soon after the millennium. Of course, price does not always reflect value. As Todd noted in another joke, “How many investors does it take to change a light bulb? None. The market has already discounted the change.” Indeed, sometimes investing is a bit like working in the dark.


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