General Electric Company (GE - Free Report) signed an agreement with French manufacturing group Alstom, under which Alstom will exit three joint ventures, in return for a consideration of $3.1 billion. The transfer of all interests to GE will occur on Oct 2.
The three joint ventures cover grid, nuclear, as well as renewable assets and were created as part of Alstom's €12.35-billion sale of its energy business to GE in November 2015. GE had acquired the French company’s energy business under former Chief Executive Officer Jeffrey Immelt.
Alstom stated that it intends to exercise options to sell its interests in the Renewables and Grid joint ventures. Per the original agreement, GE will then be deemed to have exercised option to acquire Alstom’s interest in the Nuclear joint venture.
Alstom intended to exit the businesses to concentrate on the manufacturing of rail equipment. Separately, Siemens AG (SIEGY - Free Report) and Alstom agreed to merge their rail operations in September 2017.
The 2015 acquisition of Alstom’s assets had fortified GE’s foothold in the business of servicing and maintaining gas turbines, while the joint ventures in renewable energy and electrical transmission businesses also added to its strength.
However, since then, the market for gas turbines has weakened considerably. In fact, CEO John Flannery has commented that GE was late in recognizing the weakening demand. Both GE and Siemens are now overhauling their businesses and slashing jobs to endure the slump.
GE Power is the biggest segment of the conglomerate in terms of corporate revenues. However, the unit has been a drag on earnings in the last few quarters, as global demand increasingly favours renewable energy sources. Also, overcapacity, lower utilization and fewer outages are other factors that are dampening demand. Industry experts opine that the acquisition of Alstom’s assets further compounded the problems for GE, as it increased operating costs and contracted margins.
Nevertheless, in 2017, Flannery assured investors that energy, aviation and healthcare will continue to be the focal points of GE’s operations. It has been nearly five months since Flannery outlined his plan to divest more than $20 billion of assets.
In April, GE inked an agreement to sell a trio of its health-care information technology businesses to private equity firm Veritas Capital for $1.05 billion. The deal marks one of the first notable portfolio-related moves since Flannery announced the plan to exit at least $20 billion of businesses. However, he has hinted at the possibility of the company’s disintegration into separately-traded businesses.
The overhaul, along with cost cuts and cultural changes, encompass Flannery’s attempts to pull GE out of one of the deepest slumps in the company’s 126-year history. The company’s shares have lost 47.7% in the past year, wider than the industry’s decline of 12.2%.
Zacks Rank & Stock to Consider
General Electric presently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space include Comerica Incorporated (CMA - Free Report) and State Street Corporation (STT - Free Report) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Comerica has trumped estimates in each of the trailing four quarters and generated an average beat of 5.2%.
State Street Corporation also has a decent earnings history, having generated a positive average beat of 5.5% over the same time frame, beating estimates all through.
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