General Electric Company (GE) has been strategically spinning off assets in recent years in order to streamline the business, with the sale of GE Capital the latest step. Although this move hurt the company’s bottom line in its most recent earnings report, it is a smart move in the long run. GE’s revenue declined by 12% in the most recent quarter, and the spinoff of the banking business caused profits to fall 6%. But by selling off its financial business, worth up to $500 billion, the company can become more focused on its industrial business. While this will help the company in the long run, difficult times are ahead during this transition, meaning investors should wait before initiating a position in this stock.
Exit From The Banking Business
By selling off most of GE Capital, the company is going through a major corporate transformation. This transformation started a couple of years ago, when GE started selling off assets like NBC Universal and its appliance business. The move to rid itself of the financial arm of the company, which drove revenues for the company before the financial crisis, is a major bet that the company will be better off without the potential headaches that come with the reformations in the financial industry that occurred as a result of the financial crisis.
As the seventh largest financial firm in the country, profits from GE Capital soared leading up to the financial crisis of 2008, as the financial bubble grew. Before the bubble burst, this segment of the company contributed nearly 60% of GE’s total profits. After having to be bailed out by the government in the form of $139 billion, the Federal Reserve responded by designating GE as systematically important to the financial industry and regulating it as if it were a bank.
This designation meant that GE no longer had an advantage in the financial sector over other firms, and the financial arm of the company brought more headaches than good. After spinning off the financing section and selling the real estate portion of the company, GE will become a simpler, more valuable industrial company. Now, when investors go to buy GE stock, they will know what they are getting in uncertain terms. Instead of risky loans and other confusing financial products, the company will be viewed as a pure play industrial company. Whether this resulting company will be a good investment requires looking into this segment of the company.
