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GE Remains Poised for Growth Despite Prevailing Headwinds

Zacks

On Nov 25, Zacks Investment Research updated the research report on industrial goods manufacturer General Electric Company GE.

General Electric is pruning its operating portfolio to focus on core manufacturing businesses with a digital edge. At the same time, the company has been selectively acquiring assets to boost its Industrial Internet vision.

Industrial Internet Focus

A few days back, GE Digital acquired ServiceMax, a premier cloud-based field service management solutions provider. The buyout will enable General Electric to automate and digitize the servicing of heavy-duty machinery as it aims to focus on core manufacturing businesses with a digital edge.

The acquisition is likely to accelerate the commercialization of the Predix software of General Electric. Predix is designed to add intelligence to the Internet of Things applications. It helps companies to connect their machines, data and people and run industrial-scale analytics. The combination of machine connectivity with a data lifecycle management platform powered by engineering simulation will help diverse firms to design their products for the Industrial Internet in the best way possible. This would facilitate the company to accelerate GE Digital’s existing services solution roadmaps and augment its digital focus.

In September, GE Digital acquired Meridium, Inc., a global leader in asset performance management (APM) software and services for asset-intensive industries. Meridium combines real-time analytics with reliability-centered maintenance services to offer an integrated APM solution for its clients. The acquisition will facilitate GE Digital to augment its comprehensive APM offering by leveraging Meridium’s expertise in cognitive analytics, reliability-centered maintenance, operational risk management and asset health, as well as intelligent asset strategies.

Hints of Re-Conglomeration

On Oct 31, General Electric inked a definitive agreement with Baker Hughes Incorporated BHI to merge its Oil & Gas business with the latter to form an industry leader with an unrivalled mix of service and equipment capabilities. Under the terms of the agreement, GE Oil & Gas and Baker Hughes will form a new entity (the “New” Baker Hughes) using a partnership structure, pursuant to which both the parties will contribute their operating assets to the newly formed partnership. General Electric will own the majority stake of 62.5% in the new company, and the remainder will be held by the erstwhile Baker Hughes shareholders.

With a complimentary portfolio of operating assets and integrated offerings, the new entity will be able to better serve the existing customers of both the companies. The transaction will reportedly create the second largest player in the oilfield equipment and services industry.

The partnership with Baker Hughes portrays re-conglomeration efforts by General Electric to arrest the dwindling sales of its Oil & Gas business. During third-quarter 2016, Oil & Gas revenues declined 25% year over year to $2,964 million, due to macroeconomic headwinds and volatility in oil prices. Experts widely believed that GE Oil & Gas business lacked product breadth and was losing market share in a few key product lines, leading to increased risk of asset erosion. The strategic deal, therefore, fortifies the beleaguered business to ramp up its operations to fend off competition from rivals like Schlumberger Limited SLB and Halliburton Company HAL.

Moving Forward

Although General Electric is taking steps to limit its financial exposure by divesting GE Capital assets, it remains susceptible to various market risks. The company’s objectives of simplification and productivity improvement pose operational execution risks as well. For a company as large as General Electric, the additional revenues needed for growth are quite large, posing a challenge to developing businesses on such a vast scale.

Nevertheless, we remain encouraged with the healthy growth potential of this Zacks Rank #4 (Sell) stock.

(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)

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