By all accounts, General Electric Company (NYSE:GE) should be getting out of the railroad business, rather than deeper into it. CEO Jeffrey Immelt has spent the past several years paring divisions that didn’t fit with his vision of making GE stock a pure “digital industrial” investment.
He divested the bulk of its finance business in 2015, for example, and he sold the appliance business to Haier Group early last year. Meanwhile, 2016’s rail traffic continued to deteriorate compared to 2015’s levels, leaving everyone wondering if things could get any worse for railroading in 2017.
So when General Electric announced in December that it was going to acquire train-technology company Ider to bring its “self aware” train technology in-house, some owners of GE stock were left scratching their heads.
The railroad industry appears to be dying. And this sliver of GE’s transportation arm pulls in less than $6 billion in revenue per year. If anything, Immelt should want to get out of this distracting, unfruitful business as well, right?
As it turns out, there may be a method to the madness.
Railroads’ Worst Is Behind Them
For perspective, rail traffic in Canada, the U.S. and Mexico was mostly down in 2016, following a lackluster 2015. The implosion of commodity prices and drying-up demand for coal and oil, in particular, were key contributing factors.
So far in 2017, we’ve seen some stability in rail traffic, even a little growth. That modest rebound arguably even began in 2016, when commodity prices finally perked up. Still, it’s tough to be too optimistic about rail freight.
General Electric’s interest in next-generation railroading, though, may actually make a lot of sense.
In Railway Age’s rail outlook for 2017, Jason Seidl opined:
“Year-over-year carloadings are looking better for the railroad group, with much of it due to easier prior-year comparisons. Growth in agricultural products and less of a coal traffic decline have also helped. Looking out to 2017, we have hopes for volume growth to return to the industry, albeit at a low-single-digit pace …
We believe the pending deadline for electronic logging devices (ELDs), coupled with fleet reductions in 2016 by many carriers, will limit capacity as 2017 progresses …
Coal traffic, while not expected to show a sharp rebound, should not be nearly the drag it was for the industry in 2016.”
In other words, things can only get better from here. And a pro-business, anti-regulation President Trump is likely to not only spur economic activity, but ultimately lower rail operating costs.
It was something Tom Simpson said within the outlook, though, that should really resonate with GE stock holders. He explains:
“What will help the industry survive the current downturn? Class I executives are looking to technology and an improved, more-focused quality process …
Our industry has always bounced back from economic downturns, as in the early 2000s and the early 2010s. We may see a different rebound this time, fueled by technology, innovation and continuous quality improvement.”
He’s right. And it just so happens that General Electric upped the ante on technological innovations for the rail-freight industry.
Ider in Focus
With all of this perspective in hand, the acquisition of Ider suddenly makes a lot more sense.
GE Transportation President and CEO Jamie Miller said of the deal:
“This strategic acquisition marks another milestone for GE Transportation in creating an efficient, self-aware rail ecosystem that helps customers achieve smarter outcomes made possible by sensor data and analytics. This acquisition puts GE in the driver’s seat, allowing for faster innovation and scale, digital breakthroughs and future enhancements by in-house talent.”
Though it’s still not entirely clear what, if anything, GE will add or subtract to Ider to make it and its current rail transportation business more marketable, it is clear that the rail industry is beginning to enter the digital age. At the very least, a connected locomotive (and presumably rail cars, too) will make railroads and their customers more efficient simply by giving them more information as to the status of a delivery, and tools to better manage that freight.
If this concept seems vaguely familiar, it may be because it’s a shadow of the broader advent of the internet of things, and perhaps more specifically to General Electric, a way to integrate rail traffic and its nascent but fast-growing IoT platform called Predix.
It could be the edge railroads need to attract new customers, or re-attract lost customers. Rail freight is already the most fuel- and cost-efficient means of transporting goods. It’s just so much easier to have a tractor trailer bring goods right to your door.
Ider’s technology may well change that reality.
Bottom Line for GE Stock
The expansion of GE’s tiny rail division won’t be a game-changer for the company. The GE dividend of 23 cents per share of won’t be catapulted higher, nor will earnings soar as the company revolutionizes rail freight … directly.
But if General Electric makes a move to meld Ider’s technology with other pieces of its “digital industrial” mission, the behemoth of a company becomes more of a one-stop solutions provider.
In other words, the rail division will never be a big piece of the revenue pie, but look beyond the superficial numbers. This acquisition and implementation could make GE’s other ventures more marketable 10 and even 20 years into the future.
It may well rekindle railroad stocks, too.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
