Yesterday I was one of six or seven writers who had a lunch with General Electric Co. (NYSE: GE)'s CFO Keith Sherin. I was asking myself: What is GE and why would an investor want to own its stock?"
What jumped out at me is that GE's greatest business opportunity is in building the infrastructure of emerging countries such as Saudi Arabia, China, and India. As reported in this morning's Wall Street Journal [registration required] GE expects to get about 60% of its growth in the next decade from emerging markets, including the Middle East, China, India and Brazil. By 2010, its sales are likely to reach $50 billion in those markets, up from $30 billion in 2006. GE's power, health-care equipment, aircraft engine, and commercial finance units are the likely beneficiaries.
Moreover, today GE announced $1.8 billion in energy orders from the Mideast -- consistent with that trend. But I see this opportunity as buried somewhat within a portfolio of businesses that could be a distraction from pursuing this emerging markets infrastructure opportunity. This leads me to the questions that I would like answered as a GE investor:
-
What are all of the distinct businesses of GE? Its six operating segments -- such as Industrial -- contain many distinct businesses within them as well -- such as lighting and appliances -- so it is not obvious to me how many businesses GE actually participates in.
-
What are the revenues, profits, assets, capital, and ROTC of each of those businesses?
-
What trends are likely to shape the future revenues, profits and ROTC of these businesses over the next five years?
-
What is GE's competitive position in each of these businesses and how is that position likely to evolve in the next five years?
-
What factors -- such as new technology, upstart competitors, changing customer needs -- will shape that evolution?
-
How much additional revenue or lower costs result from all these businesses being part of GE? For example, Sherin indicated that GE tries to sell more products and services, such as financing, to business customers in different industries such as media or energy.
-
If GE owns businesses likely to earn ROTC below 20% why does it continue to hold onto these businesses?
-
Could GE use the proceeds from selling these below-hurdle-rate businesses to increase its share of the emerging market investment boom?
-
Would such a focus enable GE to grow its profits faster and boost its stock price?
-
Is the emerging market infrastructure build-out too risky an opportunity on which to bet GE?
My overall conclusion is that GE believes that it has cleaned up its business over the last six years and that it's now eager to tell its story. I believe it has further to go in refining its corporate strategy. Will GE prune its business portfolio along the lines I suggested? Will GE generate sufficiently fast earnings growth to warrant a continued rise in its stock price? I sure hope so.
---
This is the third in a series of posts following a lunch I and fellow bloggers had with GE's CFO Keith Sherin:
- The first post examined NBC Universal and the surprisingly high valuation of between $40 billion and $45 billion.
- The second analyzes GE's business
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns General Electric stock.
Twitter valuation off by half: NeXt Up Research
Comfort Zone Investing: The unmighty dollar
Five winners of a weak dollar
Reader Comments (Page 1 of 1)
7-25-2007 @ 10:03PM
Tom Tom said...
The thing with GE is the joint venture with Hitachi and the nuclear power plant play.Westinghouse of the Shaw Group just got an order from China for 4 nuclear power plants and thats just the start of the nuclear power play the world is gearing up for. How well GE is positioned will determine how well they do in getting orders from these buyers in the future. Does that make me want to buy the stock, ?, not yet, not until I see GE and Hitachi get their first order for a nuclear power plant, Westinghouse and the Shaw Group is one step ahead but that step is a big one considering that its China and if all goes well with Westinghouse there will be alot more considering the client who has very deep pockets.