GE hopes transformation brings energy to its shares
Investors sense the industrial giant is fast becoming one of the biggest software firms on earth.
By Marc Courtenay, TheStreet
General Electric (GE) keeps surprising investors in ways it hopes will build excitement and loyalty. Most recently it won the energy business of French engineering conglomerate Alstom, a deal that GE snatched from the jaws of its German competitor Siemens (SI).
But CEO Jeff Immelt is looking beyond that. He wants to make good on his plan to transform GE from a finance-focused labyrinth into a heavyweight of the industrial equipment universe. The Alstom transaction is just one component of that transformation.
By spinning off its credit card business, Synchrony Financial, via an initial public offering later this year GE lowers its dependence on profits from its finance division to a target of less than 25 percent by the beginning of 2016 from 45 percent in 2013.
In addition, the company built a research center in San Ramon, Calif., just down the road from Silicon Valley. There it employs nearly 1,000 bright minds working on what GE has called its "industrial Internet," a host of software operating systems that connects physical machinery to a digital network.
With 5 percent of the company's revenue devoted to research and development, the new research facility is working furiously to fulfill GE's self-proclaimed ambition to become one of the world's 10 largest software firms. This is quite the departure from the old GE, which prided itself on being a hardware industrial provider only.
GE's Immelt recently said that rather than acquire its way into the software business it would build that business organically. So the company hired Bill Ruh from Cisco Systems (CSCO) and set off on the task of getting GE's software operations going strong.
The three-pronged areas of software development include: how to optimize the efficient performance of machines like GE's jet engines, predicting when a machine will need maintenance or repairs, and coordinating the performance of a complex system like a railway or an alternative energy grid.
Software systems that add even a small amount of operating efficiency and energy conservation will pay for themselves within a reasonable time period. Other money-savings benefits from state-of-the-art computer-based industrial programs are what customers around the globe are clamoring for.
Still, when it comes to the upward mobility of GE stock, investors need convincing evidence. Some of that will be provided when the company steps into the earnings confessional on July 18. Anticipate some encouraging guidance and further news of GE's progress to to return to its inventive, innovative roots.
GE shares been gradually stair-stepping higher after the stock price plunged at the beginning of 2014.
At around $27, shares are down nearly 5 percent for the year to date and need catalysts to recover. I'm anticipating a 3% increase in the company's second-quarter revenue and an 8 percent pop for earnings when GE reports Friday.
That may help, but to drive shares higher GE needs to announce an increase in its dividend. The current 88 cent annual dividend offers a yield of 3.2 percent, representing a payout ratio of 67 percent, so a small dividend boost can be done.
GE's charismatic CEO wants his company to reach levels of profitability and agility achieved by the best companies in the Silicon Valley. With its latest acquisitions and the progress of its "industrial Internet" its future looks as bright as one of its iconic 100-watt light bulbs.
At the time of publication the author has a position in GE.
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