In late May, General Electric (NYSE:GE) jettisoned the lighting business, which has carried it to prominence over the past 129 years. While Thomas Edison would scoff at the thought of moving his patented light bulb away from the company that purchased his incandescent lamp in 1892, the move is a welcome sign for a company struggling to keep up in the 21st century. And a bullish sign for GE stock.
While GE was at one time a top-5 company in the Fortune 500, it now sits outside of the top 30 on that very same list.
But instead of viewing this as a negative, investors should welcome the newer, slimmer GE, as it continues to revamp itself for the future.
GE Stock: Shedding Old Skin
Ridding itself of lagging business segments is nothing new to General Electric. In the past decade the company has a history of taking an ax to pieces of its business it views as underperforming.
Let’s look at business segments GE has sold a stake in over the past decade:
- Property: Sold $26.5 billion of its property portfolio to Wells Fargo (NYSE:WFC) and Blackstone (NYSE:BX).
- Finance: Sold $275 billion in GE Capital assets, including Synchrony Financial.
- Appliances: Sold to Haier Group (OTCMKTS:HRELF) for $5.4 billion.
- Industrial Solutions: Sold for $2.6 billion to ABB (NYSE:ABB).
- BioPharma: Sold to Danaher (NYSE:DHR) for $21.4 billion.
This history of offloading pieces of its business should make it no surprise that GE’s executives were willing to sell its lighting business that gave the company its start. Furthermore, it’s a positive sign of the company’s management that is able to identify areas where it can cut back and make difficult decisions when necessary.
For most companies, building a business bigger is the goal. But for General Electric, it’s just the opposite. GE spent decades building business segment after business segment, without regard for how they would all fit together in one company. As a result, the company took on significant debt to create its massive conglomerate. At one point, the company racked up over $375 billion in total debt, eating a hole in its balance sheet.
This helps put its restructuring into perspective. GE didn’t just sell pieces of its business for the sake of it; the company was able to cut its debt significantly in the process, making it more sustainable moving forward. As of the end of 2019, GE cut its long-term debt to $68 billion, and continues to take measures to purchase back debt when possible to increase liquidity.
Focusing On Its Core Businesses
By scaling back its business and loosening the anchor of long-term debt around its ankles, General Electric is in an excellent position to focus on its core businesses that provide strong revenue and profit potential.
One area that GE is focusing on is its healthcare business, which is a key area of potential growth for the company. For the first quarter of 2020, GE Healthcare saw its revenue jump by 7%, while its profit grew from $781 million to $896 million year-over-year. This was the one area of its business that actually saw positive growth on the quarter.
Then there is its aviation business. Yes, the coronavirus pandemic has all but decimated the air travel industry, severely hurting one of GE’s core business segments. But with GE garnering contracts from the likes of NASA and other government agencies, this area of its business is not going anywhere, and will remain one of its core pieces of business for decades to come.
General Electric: Shrinking to Grow
Those who view General Electric’s decision to sell its lighting business (which employs 17,000 people and generates $3 billion in revenue) as bad news is missing the bigger picture. As seen in the past decade, slimming down is the only way General Electric can focus on its most important business segments and create a more stable business as a whole.
In reference to the sale, GE CEO H. Lawrence Culp, Jr. said it perfectly. “Today’s transaction is another important step in the transformation of GE into a more focused industrial company.”
If the company can stave off a rough beginning to 2020 — which includes expected negative cash flow and a struggling aviation business — General Electric may actually be poised to revamp its business into something better than it has been in the past decade. And with a lagging stock price, this might just be the perfect time to invest in a company that is restructuring itself toward a better future.
As of this writing, Dan Pelberg did not hold a position in any of the aforementioned securities.