Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Dow 30 Profile: General Electric
A Practical Merger
In 1876 (the United States of America’s centennial), Thomas Alva Edison took the first step in General Electric Company’s (GE - Free GE Stock Report) long and storied history—he opened a laboratory in Menlo Park, New Jersey where he could explore the potential of the dynamo (one of the first electrical generators) and other electrical devices. Out of that laboratory was to come arguably one of the most influential developments of the era—a long-lasting, practical electric light bulb. By 1890, the “Wizard of Menlo Park” had brought together several of his business interests under one roof, forming Edison General Electric Company.
Around the same time, 1879 to be exact, Thomson-Houston Electric Company was established. This competitor, led by Charles A. Coffin, proved very successful, and eventually became a dominant force in electrical innovation by gaining access to a number of key patents through a series of mergers and acquisitions.
As both businesses rapidly expanded, it became increasingly difficult for either company to produce complete electrical installations and devices relying solely on propriety patents and technologies. As a result, the two competitors decided to join forces in 1892, forming the General Electric Company via the merger of Schenectady, New York-based Edison General Electric and Lynn, Massachusetts-based Thomson-Houston Electric Company. That same year, Canadian General Electric (now known as GE Canada) was formed. In 1896, General Electric was made one of the original 12 components of the newly formed Dow Jones Industrial Average and has remained there ever since.
“Imagination at Work”
GE’s new slogan, “imagination at work”, was coined fairly recently, but it dates back to the nascent days of the 20th Century. Indeed, in 1900, the company opened the first industrial research & development laboratory in the United States. However, the process was not what one would expect, and the facility would not pass “the eye test”.
Charles Proteus Steinmetz, GE’s chief consulting engineer at the time, spent years convincing top brass to invest in a research laboratory to maintain its edge in lighting and electricity as well as to search for new growth avenues. Elihu Thomson, a founder of the company, summed up the mission of the laboratory nicely: “It does seem to me, therefore, that a company as large as the General Electric Company, should not fail to continue investing and developing in new fields: there should, in fact, be a research laboratory for commercial applications of new principles, and even for the discovery of those principles.” Mr. Coffin agreed, and gave the facility a green light. So, Mr. Steinmetz set up shop in a carriage barn in his backyard, and hired two other researchers. The fruits of their labor paid off quickly, since, in 1908, the team was able to modify the company’s product, the incandescent lamp, to make it significantly more durable. Over the years, the research facility has brought many new technologies to the world, amassing thousands of patents and two Nobel prizes. It is difficult to name everything that GE has innovated, invented, or improved upon, but it has had a lasting effect on radio, television, and other media; communications and radar; plastics, electronics, and appliances; trains, aeronautics, jet engines, and the United States’ space program; and science and healthcare.
Today, GE Global Research consists of more than 3,000 employees working in New York (just a few miles from the original barn); Bangalore, India; Shanghai, China; and Munich, Germany.
A Century of Expansion
Whether it is through forming new businesses (as it did early on) or making acquisitions (as it has done more recently), the company always has an eye on expansion. It started back in 1905 when the conglomerate formed Electric Bond & Share Company, the forerunner of GE Commercial Finance, to provide financing to small utility companies. Soon thereafter, in 1911, the company absorbed National Electric Lamp Company (NELA) into its existing lighting business. In 1919, the Radio Corporation of America (RCA) was formed by General Electric and American Telephone & Telegraph (AT&T). This venture was formed to further international radio communication, and RCA eventually became GE’s retail arm for radio sales. (RCA was divested in 1930, and it would go on to become a noteworthy conglomerate in its own right. GE reacquired the business in 1986.) In the early 1930s, General Electric founded GE Credit Corporation to allow families to purchase GE appliances on credit. The unit would eventually evolve into GE Consumer Finance.
General Electric Company made its first acquisition in 1952, buying Ken-Rad Tube Manufacturing Corporation to improve its vacuum tube manufacturing facilities. In the 1960s, GE became a major force among computer companies alongside IBM (IBM - Free IBM Stock Report), Burroughs, NCR, Control Data Corporation, Honeywell (HON), RCA, and UNIVAC. The conglomerate had an extensive line of general purpose and special purpose computers, and developed an operating system for batch processing. In 1970, GE sold its computer division to Honeywell, exiting the computer manufacturing industry. Lots more innovations were made during this time, including artificial diamonds (1955), the solid state laser (1962), and safer x-ray technology (1968). In the early 1980s, GE helped pioneer fiber optics, paving the way for a revolution in the communications industry, and the MRI, which has helped to transform the healthcare sector.
In the 1980s and early 1990s, GE focused on its television and Internet offerings. It launched CNBC and MSNBC, and was the first Fortune 500 company outside of the computer industry to go online. General Electric Company went through some major transitions in the most recent decade, making a long list of acquisitions and divestitures to bolster certain parts of the business, while streamlining others. NBC bought Telemundo and the entertainment assets of Vivendi Universal, before eventually selling 51% of the division to Comcast (CMCSA) in 2011. GE Capital acquired Transamerica Finance and Dillard’s (DDS) credit card business among others, and also formed Genworth Financial (GNW). GE Healthcare, GE Oil & Gas, and GE Consumer & Industrial also made notable purchases, and the company sold off its advanced materials and plastics arms.
The General Electric Company has a number of operating segments, including Energy Infrastructure, Technology Infrastructure, NBC Universal (minority stake), GE Capital, and Home & Business Solutions.
The Energy Infrastructure group, a leader in the field of development, implementation, and improvement of products and technologies that harness resources like wind, water, and oil & gas, accounts for just over a quarter of the top line. It serves power generation, industrial, government, and other customers worldwide with products related to production, distribution, and management.
The Technology Infrastructure business accounts for almost 30% of the conglomerate’s total revenues, as well. It is one of the top providers of essential technologies to developed, developing, and emerging countries, helping to build healthcare, transportation, and technology infrastructure. The group is further broken down into Aviation, Healthcare, and Transportation.
NBC Universal is a diversified media and entertainment company. GE sold off a good chunk of the business to Comcast back in 2011, and now owns less than half the enterprise. As a result, the company now accounts for it using the equity method.
GE Capital makes up more than one-third of the top line. It offers a very broad range of financial services and products worldwide for businesses of all shapes and sizes. Services include commercial loans and leases, fleet management, financial programs, home loans, credit cards, personal loans, and other financial services.
Finally, the Home & Business Solutions group sells major appliances and lighting products worldwide. It accounts for less than 10% of the sales.
GE stock is not exactly a typical blue chip, but it does offer some interesting investment potential. The issue is ranked 3 (Average) for Safety, stemming largely from the equity’s precipitous drop in late 2008 and early 2009. These shares are also more volatile than most Dow-30 components, and have a Beta coefficient over 1.00. Moreover, the company is more leveraged than most, but still receives a B++ Financial Strength. GE stock does offer a nice dividend yield, which is likely to remain north of 3% for the foreseeable future thanks to the company’s enormous cash hoard.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.