In the grand scheme of things, compared its market cap of $258 billion, a $2.5 billion stake General Electric (GE) may seem insignificant. On the flipside, if $2.5 billion worth of GE stock makes up nearly 20% of a $13 billion portfolio, that is a big deal, as it points to great confidence in the industrial company’s future, as well as its stock.
As it turns out, these aren’t random or hypothetical numbers. A $13 billion hedge fund managed by activist investor Nelson Peltz now owns 98.5 million shares of GE stock, or about 1% of the entire company.
That’s enough to start making waves for the company, if he so desired, but Peltz says he doesn’t … yet.
What Trian Wants With General Electric Stock
If the names Nelson Peltz or Trian ring a bell, that may be because they were the man and the hedge fund, respectively, that largely shook things up for Kraft Foods — now Kraft Heinz Foods (HNZ) — back in 2007, stirred the pot at DuPont (DD) earlier this year (PDF) and most recently took on a 7% stake in Sysco Corporation (SYY).
It remains to be seen exactly what Peltz has planned for Sysco, but if history is any indication, Sysco’s management may want to buckle up.
Conversely, according to statements made thus far, current owners of General Electric stock can expect more of what they’ve already been getting from the company. That is, continued streamlining via the sale non-industrial divisions, the continued return of capital to shareholders and continued cost-cutting.
As for potential value, Trian Chief Investment Officer Ed Garden noted:
“Trian believes GE has significant long-term potential and that its implied target value per share, including dividends, could be $40 to $45 by the end of 2017 based on our view that GE can deliver EPS of at least $2.20 in 2018.”
It’s a lofty goal to be sure. GE stock is presently valued at $26.50 per share, meaning Trian is calling for at least a 50% gains over the course of the next couple of years. The fund’s principals are also suggesting per-share profits could roll in far greater than the profit of $1.84 per share analysts are collectively calling for now.
And yet, not even General Electric CEO Jeff Immelt has balked at the suggested numbers or Trian’s new involvement.
General Electric Is Already on Course
Unlike Kraft, DuPont, Sysco and a whole slew of other names Trian has targeted before, GE doesn’t need a lot of tweaking or pressure to satisfy Peltz — it’s already doing what he wants.
In fact, Peltz isn’t even seeking a seat on the Board of Directors even though the fund is now one of GE’s top 10 shareholders. The only thing Trian’s stake is apt to change is the prevention of a slowdown in the company’s transformation efforts.
To that end, though it’s already done so to a great extent by lining up or completing the sale of nearly $100 billion worth of GE Capital’s divisions (all between April and the end of last month), Immelt is nowhere near done getting out of the financial services and lending business. In June, he committed to axing the bulk of the remaining portion of GE Capital within the next two years so it can better focus on its bread and butter industrial business, a move Peltz applauds.
Peltz is also pleased General Electric is forging ahead with its plans to buy back $35 billion worth of GE stock, using a sizable part of the proceeds from the sale of its financial business. Yet, the famed fund manager thinks GE could do more, and has even suggested borrowing as much as $20 billion to fund additional buybacks.
And of course, Peltz believes General Electric can and should widen profit margins again — a call that no CEO can fundamentally disagree with. Unlike so many other companies, though, GE is actually in a good position to do so.
Bottom Line for GE Stock
The official statement from Trian released Monday morning read:
“We invested in GE because it is undervalued and underappreciated by the market despite what we believe is a transformation that will allow its world-class industrial businesses to drive attractive shareowner returns.”
That sums it up rather well, and serves as good reason for investors to own GE stock — whether or not Trian does — after years of underperformance. But, the fact that Peltz is now stirring the pot, so to speak, may in itself start to unlock some of the value that’s been trapped in GE for too long.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
