Will This Be GE's Biggest Announcement of the Year?
In 2008, industrial conglomerate General Electric faced a daunting reality: The company needed to significantly downsize an unwieldy $67 billion GE Capital business in the midst of "significant changes in the business climate for financial services." The turmoil that wreaked havoc on Wall Street's biggest institutions forced GE up against the ropes as well.
In the years since, GE's made progress to that end. More progress, in my opinion, than many of America's largest banks, as I pointed out in a recent article. And this week we will learn more about GE's efforts in 2013 and its future plans with regard to GE Capital. The GE Capital Investor meeting will be held on Friday, Nov. 15. In advance, let's look at where GE Capital stands today and why this week's meeting could reveal some crucial information for GE shareholders.
Honey, I shrunk the bank!
GE's epiphany in 2008 was simple: The company needed to get back to making things, not financial products. An ideal solution would have been to spin off GE Capital in its entirety, but that wasn't a realistic possibility. The business was too intertwined, and-quite frankly it was massive. Instead, GE planned to shrink its financial arm, while chopping off small pieces from time to time. The overall effect has been a gradual decline in assets and revenues contributed by GE Capital:
Over time, GE Capital's total assets have declined by about 21% from 2008 through the third quarter of 2013. But the company frequently refers to Ending Net Investment (ENI, also shown) to assess the company's progress in downsizing. ENI looks at the total capital GE has invested in its finance operation. In other words, how much skin is still in the game here?
Using that metric, GE's shrunk the business by about 27% since 2008. No small feat when you consider the company's shed $141 billion of its investment and boosted profitability along the way. Revenues are also down from a high of $67 billion to $46 billion at the end of 2012, a 32% drop.
GE's taken the right steps thus far, and shifted GE Capital to somewhat plain vanilla lending to shore up its balance sheet. Still, management at the company still has a lot of work to do. Bear in mind, financial markets are not known for their unending patience, even with these types of complex turnarounds.
Why a smaller GE Capital is BIG news
Most recently, during GE's third-quarter earnings call, analysts probed the management team for insight on the future of GE Capital. GE, however, continues to keep its cards close to the chest.
CEO Jeff Immelt's response was brief as he pointed out: "[T]hese things always take a little bit of time, but we are still planning staged exits of the value-maximizing platforms of GE Capital. We have got a big meeting set November 15 with Keith and Jeff; I think there will be more clarity at that time on the Capital side."
Whether this "big meeting" will reveal big plans or simply have lots of attendees is up in the air. There's some ambiguity there. But the Wall Street Journal broke a story in August that stated GE is planning to spin off its retail lending business.
As a result, investors seem to expect nothing less at this point. This would be a big step in the right direction for GE Capital, which derived 34% of its revenues from the consumer-oriented retail lending business in 2012. And, who knows, the company could reveal an even broader plan that would spin off an even larger segment.
As I've said before, the quicker GE can detach its fate from the ebbs and flows of the GE Capital business, the better. So far, slow and steady progress has paid off, and the company's stock, up 28% this year alone, has followed suit. Could there be more gains ahead for investors? Perhaps. All things considered, I'm predicting this will be one of GE's biggest announcements of the year.
Editor's note: An earlier version of this article gave an incorrect date for the upcoming GE Capital Investor meeting.
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The article Will This Be GE's Biggest Announcement of the Year? originally appeared on Fool.com.
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