| April 14
April 14 As General Electric Co starts
spinning off its consumer credit card business, some on Wall
Street are hoping that the U.S. industrial conglomerate will
eventually slim down its GE Capital finance unit even further.
Commercial real estate, which GE Capital expects to make up
10 percent to 15 percent of its portfolio in the future, stands
as another major potential area for GE to abandon, analysts and
GE's finance presence has been under scrutiny ever since the
company's share price plunged after the 2008 credit crisis.
Thursday's earnings report from GE presents the next chance for
analysts to address the company's strategy.
"From my investor's point of view, the more they look like
an industrial company, the better off they are," said Andrew
Meister, an equity research analyst at Thrivent Investment
Meister and others say that GE's finance presence makes for
a more complex company that forces its shares to trade at a
discount to manufacturing rivals.
GE trades at 15 times forward earnings estimates compared
with 16.7 times for United Technologies Corp and 16.3
times for Honeywell International Inc, according to
Thomson Reuters data. Financial companies such as CIT Group
, Wells Fargo and Bank of America trade
between 12 to 13.5 times forward earnings estimates.
The future of GE Capital is central to a larger issue facing
GE and other conglomerates: What mix of businesses makes the
most sense? Barclays analyst Scott Davis raised the topic for GE
last month in a research note with the provocative title: "GE:
Structurally Broken Story?"
"The overwhelming evidence, in our view, suggests that GE
should not be in the banking business; the appliance business;
the lighting business; datacenters, or any other non-core,
non-infrastructure based business," Davis wrote of the company,
which makes large equipment including jet engines, gas turbines,
and MRI machines.
To be sure, GE has responded to the concerns by taking steps
to reduce its exposure to finance, with the spin-off of its
North American retail finance business being the most
The unit -- which bankers and analysts have valued at
anywhere from $16 billion to $30 billion -- filed for an IPO
last month under the name Synchrony Financial, part of a plan GE
laid out in November for separating the business entirely in
2015. It's not clear when this year the spinoff will happen.
Synchrony's divestiture should put GE at least close to
Chief Executive Jeff Immelt's goal of cutting the company
earnings contribution from GE Capital from about 45 percent last
year to 30 percent by 2016.
The bulk of the remaining GE Capital business will focus on
lending to small and mid-sized firms, which allows GE "to keep
their pulse on various industrial end markets," said Brian
Langenberg, an analyst with Langenberg & Co.
GE also finances sales of products in GE's main industrial
areas, such as aviation, healthcare and energy, with about 5
percent of GE Capital that now funds GE's own products.
In commercial real estate, GE Capital does plan to sell off
assets in which it holds an equity stake such as buildings. But
the company still sees providing financing for commercial real
estate properties including refinancings and loans for new
buildings as a core part of GE Capital.
"It's an asset class we know very well, and it's a solid
returning business," GE Capital spokesman Russell Wilkerson
said, noting the company's 40-year history in such lending.
Not everyone agrees with the fit.
"The one (main) part that GE just doesn't seem aligned with
other people is GE still wants to stay in the real estate debt
book," said Shannon O'Callaghan, an analyst at Nomura.
Said Daniel Holland, an analyst with Morningstar: "You have
to think really hard about a good reason for them owning that
(Reporting by Lewis Krauskopf; editing by Andrew Hay)