It was August, 2000, not long after the tech bubble's peak, that the shares of General Electric Co. crossed the $60 (U.S.) mark. Two crashes later, the stock hasn't come close since – and may not for several more years.
"You can think about it as the two lost decades at GE," says analyst Nicholas Heymann of William Blair & Co. LLC. "It's kind of mind-boggling. It's like the Japanese economy."
The succeeding two decades, however, promise to be much, much better for one of the world's greatest industrial companies. GE is walking away from its parts that cater to the consumers of the developed world, as evidenced by its 2013 sale of NBC Universal and this week's disposal of its consumer appliances business to Sweden's Electrolux. Instead, it's turning its focus to energy and infrastructure, particularly in the developing world. GE's pending purchase of French company Alstom's power and grid business, expected to close next year, is a big part of the strategy.
Investors, however, have been caught up in GE's periodic earnings misses as well as worries that Alstom's business will depress the company's profit margins. Questions about near-term capital spending in the energy sector mean it's nearly impossible to see a "catalyst" for GE's stock over the next year. Even Mr. Heymann, who's positive about GE's long-term prospects, has a "neutral" on the shares when he projects returns over the next 12 months.
"We can see the fundamental transformation, but we're trying to figure out when the market actually gives GE credit for it," Mr. Heymann says. If GE can deliver earnings that are consistent with expectations, he says, that "will allow investors' focus to shift to what GE is doing to set up the second half of this decade – and then the next decade."
GE traces its roots back to 1878 and Thomas Edison's Edison Electric Light Co. For the succeeding century-plus, the company grew through a series of innovations and top-flight manufacturing. Through its legendary CEO, Jack Welch, it also became known for developing managers and executives through a rigorous culture of evaluation.
By the time of the 2008-09 financial crisis, however, it was more bank than industrial company thanks to the outsized growth of its GE Capital unit. GE started the capital division to provide customer financing for its own products, but it expanded to the point where it was easily the company's biggest segment, providing more than one-third of GE's revenue and more than half its operating profit in 2007. It had a coveted "AAA" credit rating.
"GE Capital's expansion into different types of loans exposed it to unnecessary risks, which we think it had no fundamental advantage in underwriting," Morningstar analyst Keith Schoonmaker writes in a recent report. "The financial crisis forced the company to rethink and cut the bank down to its bare essentials. Although this will lower the bank's margin contribution down the road, we believe this paring more closely links GE Capital to GE's other businesses."
GE spun off a chunk of GE Capital in a newly named business, Synchrony Financial, at the end of July. (The shares, trading on the NYSE, have barely managed to cross $26, even though Mr. Schoonmaker assigns a fair value of $36 to them.) GE plans to spin off the remainder of the company after U.S. regulators give their blessing, probably no sooner than a year from now.
The future of GE is less finance, more energy and infrastructure. "What we're finding now, and GE realizes this, is that we still have four and a half billion people on this planet that are not part of the 21st century," Mr. Heymann says. "They don't have the basic functionality of clean water and electricity and transportation and an adequate supply of food. These are really basic necessities we take for granted. And we think infrastructure is the new defence. We've got a too big a gap between have and have-not countries and within populations of those countries."
GE is spending $16.9-billion on Alstom's energy business, nearly as much as it raised by selling its NBC Universal stake. The deal, says Mr. Heymann, "should soon enable GE to offer the broadest array of power solutions … of any company in the world."
The GE oil and gas division, which hosted its first investor day this week, serves all facets of the natural-gas and oil industries, from drillers and explorers to pipeline companies to refiners. Underwater offshore operations ares a particular focus; Mr. Heymann says GE believes its processing solutions could ultimately reduce the capital spending required to recover a barrel of offshore oil by 30 per cent to 40 per cent and reduce surface processing costs by up to 50 per cent.
For the short term, however, investors seemed focused on how the Alstom's lower profit margins could shave a full percentage point off GE's numbers. Mr. Heymann says that if GE follows up its appliances divestiture with the sale of its lighting business, and then continues improvements at its energy-management business, it can easily make up the difference.
For the past two years, GE has traded at a 4-per-cent discount to the broader market, which would have been an unusual occurrence in Mr. Welch's era. Analyst Jim Corridore of S&P Capital IQ believes GE's "transformational initiatives" will turn that around: His target price of $32 reflects 17.3 times his 2015 earnings per share estimate, slightly higher than the overall market. "GE will benefit from an improving global economy better than most industrial companies."
Says Mr. Heymann: "This is like an aircraft carrier – you don't turn it on a dime. And it's been in dry dock, but they're just starting to open it up and demonstrate they've fixed it. And we haven't had the christening yet. But it's coming."
The author owns GE stock.