Business cycles have always been opportunities for GE, and today’s environment of lower oil prices is no different. To take advantage of a volatile world, GE has been investing in its core infrastructure businesses, simplifying its operations and leading the next industrial era of machines connected through the Industrial Internet.
“We capitalize on cycles by investing when others can’t, and persisting through periods of doubt,” GE Chairman and CEO Jeff Immelt wrote in his annual letter to shareowners, which will be published later this month. “GE plans to be a stable partner to our oil and gas customers during good times and bad. Our financial strength allows GE to invest when others walk away.”
The advantage of GE’s current portfolio is the ability to thrive during periods of disruptive events and commodity cycles – like the recent downturn in the price of oil. “We’re not distracted by short-term adversity – we lean into it,” Immelt said. “If you stop investing – for instance, if we had not doubled down on aircraft engine development after 9/11 — you lose for 30 years. Instead, our CFM LEAP engine has a 79 percent market share since launch.” (See graphic above.)
Similarly, GE is currently the only company taking orders on the Tier 4 freight locomotive, designed to meet new EPA standards, because it invested aggressively at a time where competitors did not.
In the oil and gas sector, GE has diversified beyond surface and subsea drilling (about 40 percent of its portfolio) into compressors and turbines pushing oil through pipelines and technology boosting refinery production (60 percent percent of portfolio). This technology, unlike surface drilling, is less prone to cyclical changes.
GE’s ability to play through cycles follows a decade in which Immelt has repositioned GE as a more focused, high-value industrial company, investing in core infrastructure and selling businesses in which GE lacked the competitive edge. (See GE’s 2014 Annual Report.) “We have exited all the industrial businesses that didn’t fit the infrastructure model,” said Immelt, when providing GE’s 2015 outlook to investors in December. “By 2016 more than 75 percent of our earnings are going to be an output of that.”
Analysts agree. “In our view, there are more changes happening at GE today than in any previous period in the company’s history,” wrote Deane Dray of RBC in January. “CEO Jeff Immelt has divested more than half of the revenues inherited from the Jack Welch era. We expect the portfolio pivot to 75 percent industrial technology and 25 percent finance by 2016 will be a game-changer, both in how investors perceive GE and its expected boost to valuation.”
2014 was a year of strong execution for GE, achieving 7 percent industrial segment organic revenue growth. That compares to 2 percent for Siemens, 3 percent for Honeywell, and negative 1 percent for Caterpillar. Margins continue to improve at a rate that impresses many analysts.
GE also used 2014 as a key year to advance its portfolio transformation, announcing the acquisition of the power and grid businesses from France’s Alstom, spinning off non-core assets like the retail finance unit Synchrony, and agreeing to sell its appliances business to Electrolux.
According to Immelt, “every business in the industrial sector can leverage all of our capabilities, what we call the GE Store: technology, services, global footprint, simple structure.” (See graphic above.)
“We have profoundly changed the company, to lead the next generation of industrial progress,” Immelt writes in his letter to shareowners. “Today, we offer investors consistent growth in a volatile world, with a strong dividend yield, and a set of businesses that share competitive strengths.”
