GE Mulls Sale Of Its Appliances Unit As It Seeks To Lift Its Industrial Margins

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General Electric

General Electric (NYSE:GE) is mulling sale of its century-old consumer appliances business, as it is seeking to raise margins in its industrial business. Swedish consumer appliances manufacturer, Electrolux, confirmed last week that it is in talks with GE to buy the latter’s appliances business. However, Electrolux added, “no agreement has been reached, and there can be no assurances that an agreement will be reached”. [1] In our view, GE will sell its appliances unit if it gets a good price. GE tried to sell this unit back in 2008 as well, but talks with potential buyers at the time got stalled due to the financial crisis.

The appliances unit, which makes consumer products such as dishwashers, refrigerators and ovens, has played a key role in making the brand GE a household name. But, returns from this unit have increasingly lagged behind those from GE’s other industrial businesses including airplane engines, gas turbines and oil industry equipment. Though GE does not report results for its appliances business separately, this business constitutes the majority of its appliances and lighting unit. Last year this unit generated profits of $381 million on sales of $8.3 billion. So overall, even as the appliances and lighting unit constituted 8% of GE’s industrial segment revenue, it constituted a mere 2.3% of the company’s industrial segment profit. [2]

After efforts of sell the appliances business ended in 2008, GE invested about $1 billion in this business to revive its performance, but its margins have continued to remain low. In our view, as GE’s appliances business is focused on the U.S. market, it is lagging behind other global consumer appliance makers such as Electrolux, Samsung and LG which have a wider global footprint. This wider global footprint is benefiting these international consumer appliance makers as growth in this industry is being driven by the emerging markets.

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We currently have a stock price estimate of $28.33 for GE, around 8% ahead of its current market price.

See our complete analysis of GE here

GE Is Focused On Lifting Its Industrial Segment Margins

Over the last few years, GE has focused on growing its industrial segment margins in an attempt to grow its profits at healthy rates. The current tough global macro environment has tempered GE’s top line growth, so the company is seeking to add growth to its bottom line through margin expansion. In 2013, large scale cost reduction enabled GE to expand its industrial segment margins by 66 basis points. This margin expansion enabled the company to grow its 2013 profit in mid-single digits on a year-over-year basis even as its 2013 revenue remained flat. In the current year as well, GE aims to slash about $1 billion from its structural costs to further lift its margins. We figure sale of the company’s low-margin appliances business will help lift its overall industrial margins.

For Electrolux, the acquisition of GE’s appliances business will enable it to expand in the U.S. and more importantly this acquisition will allow Electrolux to diversify from its European base, which will likely grow moderately in the coming years due to slow economic growth in Europe. GE’s strong hold in certain segments such as sale of consumer appliances to home builders is an added attraction for Electrolux. However, GE on its part, according to reports, is likely also talking to other potential buyers including Samsung, LG and the five-year-old start-up, Quirky. This start-up which makes consumer appliances based on feedback received from consumers recently partnered with GE to produce a line of air conditioners that can be controlled from a smartphone.

All in all, we figure if GE gets a good price for its appliances business, then it will likely not hesitate in selling this business, as this sale will help lift the company’s overall industrial margin. Proceeds from this sale could also be invested in other more profitable industrial businesses of the company to earn a greater return on investment.

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Notes:
  1. GE in talks over selling its business in appliances, August 14 2014, dealbook.nytimes.com []
  2. GE’s 2013 10-K, August 19 2014, www.ge.com []