Stop, General Electric! Before It's Too Late!
Sep 27th 2012 2:25PM
Updated Sep 27th 2012 2:30PM
There's a big question facing shareholders of General Electric (NYS: GE) today. Should this line read: "Stop, General Electric! Before it's too late!?" Or should it read: "Stop General Electric, before it's too late!?"
How you punctuate the sentences could be the difference between profits and losses on your next portfolio statement.
A matter of punctuation
Yesterday, as you may have heard, GE floated plans to do for (to?) the mining business what it did for (to?) the energy business a couple years ago.
Think back to 2010, when GE CEO Jeff Immelt embarked upon his multiyear turnaround plan with a promise to spend $30 billion reinvesting in the company's industrial roots. GE executed on that promise, and in spades, buying oil and gas equipment maker Dresser, pipe manufacturer Wellstream Holdings, and John Wood Group's oil well support division in quick succession. According to The Wall Street Journal, GE's spent a good $11 billion building up an oil and gas equipment business -- and done right well with it, probably generating $14 billion in revenues from the unit this year alone.
As price-to-sales ratios go, that one's not half bad. And while $14 billion doesn't yet make GE a leader in making oil and gas equipment, it's a big enough business to be able to compete effectively with more established players such as Halliburton and Baker Hughes. Again, not bad for a company accelerating from a standing start. And don't look now, but GE appears to be ready to take on yet another new industry.
Can GE be stopped?
In May of this year, GE announced a pair of acquisitions in the mining equipment industry, paying in excess of $700 million to acquire Fairchild International and Australia's Industrea. This, however, is only the beginning of GE's ambitions in the industry.
Earlier this week, GE unveiled plans to more than double its mining business in an effort to generate $5 billion in incremental revenues by 2016. So once again, GE seems ready, willing, and able to launch itself into another business and challenge established players. This time, however, the company's timing may be a bit off.
While it's boom times for oil and (especially) natural gas these days, the opposite appears to be happening in the mining industry, where just last month global mining giant BHP Billiton (NYS: BHP) declared the end of the global mining boom. Already, both BHP and rival Vale have pulled plans for a three major combined mining projects, removing billions of dollars of potential equipment sales from the pipeline in the process. A third mining concern, England's Anglo American, cut its capital spending budget by $1.5 billion in July.
As a result, anyone counting on a repeat of the 22% revenue growth seen at mining equipment makers Terex (NYS: TEX) and Caterpillar (NYS: CAT) last quarter, or the 35% growth that Joy Global (NYS: JOY) boasted of, may be bound for significant disappointment. Joy, for example, recently warned that its new orders in the quarter ended in July were down 25% year over year. (And the stock's down 14% over the 52 weeks. Coincidence?) Meanwhile, Cat was set to yowling, when an earnings warning over weak mining equipment prospects sent its shares tumbling 4% on Monday.
Check yourself before you wreck yourself
Headlines like these make a Fool wonder: Is GE investing in mining equipment based on yesterday's news? Does the CEO even read the newspaper, and realize what's happening today?
Or is GE, perhaps, targeting investments in mining precisely because the industry's starting to look vulnerable, in hopes it can buy itself some mining equipment market share on the cheap?
After all, I'd wager good money that the folks who sold their oil and gas equipment divisions last year didn't realize (at the time) that they were selling for a P/S ratio that would (eventually) work out to less than 0.8 times. Similarly, anyone who worries that GE's CEO is acting crazy by diving into mines in today's economy should take a moment and consider: The very moment when Cat is licking its wounds, may be the best time for GE to start acting crazy... like a fox.
For GE, the recent financial crisis struck a blow, but management took advantage of the market's dip to make strategic bets in energy. If you're a GE investor, you need to understand how these bets could drive this company to become the world's infrastructure leader. At the same time, you need to be aware of the threats to GE's portfolio. To help, we're offering comprehensive coverage for investors in a premium report on General Electric, in which our industrials analyst breaks down GE's multiple businesses. You'll find reasons to buy or sell GE, and you'll receive continuing updates as major events unfold during the year. To get started, click here now.
The article Stop, General Electric! Before It's Too Late! originally appeared on Fool.com.Fool contributor Rich Smith is neither long nor short shares of any company named above. The Motley Fool has a disclosure policy. The Motley Fool owns shares of Joy Global. Motley Fool newsletter services have recommended buying shares of Halliburton. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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