GE to sell GETS (GE Transportation GE Rail) to WABTEC

[Allen Hazen]

(Disclaimer: I amnot an economist, or a close observer of the stock market. What follows is a layman's take.)

1) A couple of news stories linked have mentioned a firm of "activist investors" called Trian, which has recently managed to get one of its people a seat on GE's board of directors. I think Trian may have a general strategy of pushing companies to "divest" assets. A few years ago, when DuPont split itself up, spinning off some chemical divisions as a separate company called, i.i.r.c., Chemours, Trian's influence was behind the decision.

2) The freight locomotive business is, I suspect, "hypercyclical" (not sure if that is a standard term or one I made up): the difference between how it does in good economic times and in bad economic times is greater than average (so: it "hyper-responds" to business cycles). I take it that this is because the "use-by" date for an aging locomotive isn't sharply defined: at an age when, if railroad business was booming, railroad management would replace a unit, in poor times railroad management can reduce that year's expenditures by making it soldier on a bit longer.

3) For other reasons, the railroad industry as a whole is hypercyclical. Running (and maintaining) a railroad line carrying 50 million tons per year DOESN'T cost 25% more than running (& m.) one carrying 40 m.t./y., so a large proportion of the added revenue a railroad gets in a boom year is profit. So even if the difference (between the ups and downs of the business cycle) is only a few percent in revenue, it's a much larger percentage of profits.

4) "Hypercyclicality" (in moderation) doesn't frighten an investor interested in the long term (particularly one who also has a portfolio of less hypercyclical investments to keep the money coming in in bad times): Warren Buffet was willing to invest big-time in BNSF despite the ups and downs of the railroad industry. But I don't think people like Trian are particularly keen on taking the long term perspective.

[R36 Combine Coach]

On a related note: Westinghouse (GE's longtime rival) sold off its transportation division (rail equipment) in 1989 to AEG/Daimler and as of the late 1990s the division (then under AdTranz and now the Bombardier Pittsburgh Shops) was doing better than ever after it was spun off (Post-Gazette, 1998).

Employment at Westinghouse's former people mover and transit car unit, which was divested in 1989 and is now called Adtranz, has more than doubled to 1,800 worldwide, including a jump from 580 to 900 at its North American headquarters in West Mifflin. Sales rose from $218 million in 1996 to $254 million last year.

This may be the same coming for GE.

[MEC407]

4) "Hypercyclicality" (in moderation) doesn't frighten an investor interested in the long term (particularly one who also has a portfolio of less hypercyclical investments to keep the money coming in in bad times): Warren Buffet was willing to invest big-time in BNSF despite the ups and downs of the railroad industry.

Could Transportation become the next big Berkshire Hathaway acquisition?

[Gilbert B Norman]

I can only hope, as a GE shareholder who has only seen an 8% share price gain during the Immelt regime while the S&P gained 253%, I want somebody to shake the rafters around there.

I defer to others to evaluate this strategy of spinning off profitable units. Hey I'm paying 'em enough to look out for my interests - and the last gang didn't do too much of that.

But I have pretty strong confidence that railroad locomotives will continue to be built at Erie and Ft. Worth for an American owner. The political winds are blowing in that direction.

Oh, and the story is lead article in the Journal's Business and Finance section print edition today.

[BandA]

The Chinese are awash in dollars from their trade surpluses...although they just sold some dollar-denominated government bonds, which confuses me. So look for Chinese or other foreign investors to outbid Americans for GETS.

[Nasadowsk]

They should move everything to the cloud. It won't solve any issue, but it sounds good and investors will love it. Fluffy clouds.

Could is so last year. Now it's 'internet of things' and 'automation'. Neither of which GE is particularly good at...

GE looking to toss GETS suggests that the company is in bigger trouble than they're letting on to. Especially because they're looking to dump a few other divisions, including some stuff in healthcare, of all places...

[newpylong]

All info linked to one WSJ article. Believe it when you see it.

[Allen Hazen]

Newpylong--
Thanks for the heads-up about sources!
There was also a "New York Times" article on 20 October 2017 (byline: Steve Lohr), which reported the goal of selling $20 billion in assets, but didn't mention Transportation as being on the block. Key paragraph:
"G.E. also announced it would sell off $20 billion worth of businesses over the next year or two. Mr. Flannery did not say what those operations would be, but further information may come next month when Mr. Flannery addresses analysts and investors at an event billed as an in-depth presentation of his strategy."

The article reviewed a number of GE businesses, noting that some had had disappointing results in the past few years, but didn't mention Transportation.

[mkirsch]

GE Transportation has been a part of GE through out good and bad times, selling it will not turn around GE

No, but it is one of the more valuable divisions, and what they need is CASH. NOW.

Seen this many times. International Harvester. Kodak. Chrysler. Xerox. The unprofitable parts of the business are basically worthless, and divesting of those will do nothing in the here and now, if you can even find a buyer.

It would seem smart to get rid of the unprofitable divisions and keep the profitable ones, but the opposite usually happens when a company gets to the latter stages of circling the toilet. They've waited too long, and are now in a position where they need to raise cash to keep the doors open. They can't wait a year for the profits to roll in because the debt collector is banging on the door with an eviction notice TODAY, and they've already run out of IOUs.

[mtuandrew]

Seems like GE Aviation would be more profitable & an easier sale than GETS, as well as a little further from its corporate core. That said, GE isn’t really poised to build anything other than a single type of high-horsepower freight locomotive in America, unless they’ve been shopping around the PowerHaul or a V-8 GEVO.

[Gilbert B Norman]

Mr. Stephens, a very disturbing thing I heard during '16 from a United Flight Officer was that the GE engines on the 777 aircraft inherited from Continental were not as reliable as the P&W's on United 777 heritage aircraft.

Who knows what foundation that statement had beyond intracompany rivalry, but just thought I'd throw it out FWIW - if anything.

disclaimer: author holds long positions GE and UTX

[es80ac]

I don't believe GE is in that desperate of a situation. The last few years under Jeff Immelt, GE just steadily but boringly humming along, there was no division that was bleeding heavily for GE, or that would have been axed a long time ago. The problem is the greedy wall street bunch only care about earning upside blow outs, which GE was not in the position to deliver. So now they want have everybody to believe the sky is falling which it is not. The sharks are circling to get a quick pound of flesh, and that's all there is to it. If GE is a private company, the owners should be very happy about the state of the business, which is stable and steady.

GE Transportation has been a part of GE through out good and bad times, selling it will not turn around GE

No, but it is one of the more valuable divisions, and what they need is CASH. NOW.

Seen this many times. International Harvester. Kodak. Chrysler. Xerox. The unprofitable parts of the business are basically worthless, and divesting of those will do nothing in the here and now, if you can even find a buyer.

It would seem smart to get rid of the unprofitable divisions and keep the profitable ones, but the opposite usually happens when a company gets to the latter stages of circling the toilet. They've waited too long, and are now in a position where they need to raise cash to keep the doors open. They can't wait a year for the profits to roll in because the debt collector is banging on the door with an eviction notice TODAY, and they've already run out of IOUs.

[MEC407]

Mr. Stephens, a very disturbing thing I heard during '16 from a United Flight Officer was that the GE engines on the 777 aircraft inherited from Continental were not as reliable as the P&W's on United 777 heritage aircraft.

Oddly enough, I've heard the exact opposite re: GE90 engines vs. PW4000 engines.

However, the 777 engine that garnered the most headlines was the Rolls-Royce Trent 800, which initially had a flaw that caused ice crystals in the fuel to clog up the engines' heat exchangers. This flaw caused the crash landing of British Airways Flight 38 in 2008. Rolls-Royce eventually developed a fix for this.

There were two engine fire incidents, one involving a PW4000 engine (Korean Air) and one involving a GE90 engine (British Airways). Neither incident caused serious injuries, fortunately.

[Ira]

Can someone explain what a spin-off of Transportation means versus selling?

[Allen Hazen]

My understanding (I think I've already confessed to not being a stock-market follower, so my understanding may be … a bit hazy) is that to "spin off" a division is to allow it to become an independent company. Often this involves a "management buyout" in which the management of the division somehow gets the money (bank loans?) to become the main owners of the new company. From the point of view of the parent company, then, this amounts to selling the division: by selling it to a new corporation which will operate it independently.
In other cases of "spinning off" (for instance the DuPont spin-off of Chemours mentioned in an earlier post as what Trian seems to promote), no money, initially, changes hands: the division spun off becomes a new company, with shares that are distributed to the stockholders of the parent company. Those stockholders then become stockholders in TWO companies, the old parent and the spin-off: depending on their investment strategies they can then sell one and keep the other.

One speaks of "selling" a division if the parent company sells it to another existing company, so that it become a division of the buying company.