Internet of things sparks a revolution at giant GE
Published 11/04/2016 | 02:30
If the company we are examining today, the American giant, General Electric (GE), was a European football club, it would probably be Arsenal, Bayern Munich, Barcelona, Paris Saint-Germaine and Juventus all rolled into one.
It has a range of products, skills and talents that - if the stock market is to be believed - make it more valuable than all of its four biggest rivals put together.
While Apple is seen as the world's most powerful marketing machine, GE is the engineering equivalent.
Its products and services include jet engines, wind power, and medical imaging. It is valued at $287bn, has 300,000 employees, trades in 170 countries with sales of almost $3bn per week and is the only company listed on the Dow Jones Index which has been there since the Index was first inaugurated in 1896.
In addition it has transformed its business completely in the last five years, and the revamped GE promises many more distinctions.
Perceived by some investors as an unwieldy hybrid of banking and manufacturing, the group has decided to return to its roots and focus on energy, water and aviation. It even turned its back on lucrative financial services and jettisoned its century old legacy businesses. As a result GE has become a totally different company than it was five years ago.
Then, the average American (and sometimes the average European) could go home, switch on a GE light bulb, pick a frozen pizza from your GE fridge and pop it into a GE microwave, watch GE-owned NBC TV, then with nothing good on 'the box', the average householder could sort out his/her GE savings or credit card accounts.
This is now no more, as these have been divested or in the process of being sold, as part of restructuring.
With its new focus, last November, the company (still the world's largest maker of gas turbines) purchased the French group Alstrom's energy division for $10bn. It overcame initial French government objections and a rival bid from Siemens.
The deal means GE can expand its wind power business and strengthens its grip on the lucrative gas turbine business.
It expects to generate $1bn in savings this year, and almost three times that by the end of the decade.
GE's share price of $30 is just short of its five-year high of $32, is 50pc above last year's share price with a price earnings multiple at a lofty 26. At one time in 2011 the shares were trading as low as $13 per share.
Early last year the company announced it would sell most of its finance division, returning the cash to its shareholders, including buying back $50bn of its shares; the second largest in history after Apple. As part of this divestment programme it has sold its commercial property portfolio, healthcare financial services, online banking and transport finance units and further divestment is expected.
However it plans to retain $90bn to finance the selling of its products such as jet engines and medical equipment.
Everything about GE is shockingly large. Last year it generated $4bn from software services, a modest 3pc of revenues; if it was a stand-alone business; it would be among the top ten global software companies. By the end of this decade the company expects software to generate revenues of $20bn.
GE has also discovered the internet in a way that must put the frighteners on the competition. While it continues to purchase steel by the ton it plans putting digital intelligence and communication systems in everything it builds in the future.
It believes industrial internet applications can be applied to the biggest and most complex machines and consequently will have an application in all of its manufacturing processes.
No doubt the company is correct and the changes will bring savings that will run into billions of dollars. With its change in direction away from consumer goods and banking together with its industrial internet potential, GE should see its shares move beyond its five-year high.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.