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GE’s Corporate Restructuring a Major Bullish Theme for 2013

We're likely to see other companies follow GE's example this year to cut costs


The second most important corporate news of the past week was the announcement by Comcast (NASDAQ:CMCSA) that it would buy the half of NBCUniversal from General Electric (NYSE:GE) that it doesn’t already own. The most important news was what General Electric said it would do with the money it received. It turns out that GE is making a sensational U-turn from its forays in entertainment and finance, and returning to its roots in heavy industry and electronics. And we learned that GE plans to use the Comcast money to finance its restructuring and reduce its share base in a massive accelerated buyback program.

These two elements play into the big theme that I have identified this year: corporate restructuring. As businesses like GE transform themselves for the next decade, they are shedding units and dumping payroll. These efforts will keep unemployment stubbornly high, while at the same time shrinking expenses. The effort will be harmful to workers overall, and thus possibly harmful to the broad economy — but it will help companies meet earnings growth goals in an environment of slow revenue growth.

Did I mention the size of GE’s buyback program is huge? I think I did, and here’s how huge. Now, some big companies announce $500 million or $1 billion buyback programs; sometimes a couple billion. But GE said it would buy back as much as $10 billion worth of its stock this year. The size of this buyback program boggles the imagination.

How much is it really? Well, according to my back-of-the-envelope calculations, there are 321 days left in this year. Take out 92 weekend days, and about 10 holidays, and you are left with around 219 trading sessions. Divide $18 billion into that, and you’ll get roughly $82.2 million worth of buybacks a day. In a $23 stock, that’s roughly 3.5 million shares a day. Consider that the stock trades around 42 million shares a day on average; that means GE is going to buy back roughly 8.5% of the daily volume. Every day, rain or shine, on average — though probably a lot more on any days with a big downdraft.

That already seems like a big deal, and even if it’s half that amount, it’s still a lot. But one crucial element is that those shares are then off the market forever. And every day, it thus becomes a little bit easier for GE to post higher earnings per share, because the number of shares is shrinking. Now of course this will be discounted by the market — but not as quickly as you might think.

The upshot is that once again we have a situation where the number of shares for sale overall in U.S. markets will get smaller. Couple that with an increase in merger and LBO deals in which, say, all the shares of Dell (NASDAQ:DELL) will come off the market, and you have an increasing number of confident investors trying to buy fewer and fewer shares of stock. The stock market is like any other market: when demand rises and supply shrinks, prices rise. Thus the GE deal and the buyback announcement are two more very positive elements that will help undergird equity markets this year.

Sure, there will be setbacks of 5%-7% to reset sentiment from time to time; they can’t be avoided. But overall, this is shaping up to be a year when the broad market could be up 15%-20% or more.

InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage which aims to capture profits of 15% to 40% and often as much at 100% to 200% in less than 90 days. 

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