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General Electric | Fundamental Analysis

Long
NYSE:GE   General Electric Company
General Electric's $1.45 billion cash acquisition of advanced surgical imaging company BK Medical announced last week would have been something out of the ordinary for GE a decade ago. These days, however, it's much more important. This deal is CEO Larry Culp's biggest acquisition, a leader noted for his ability to acquire businesses, and it should give shareholders certainty in the company's future. And here's why.

First, the deal will support growth. BK Medical makes imaging and surgical navigation technology used in surgery and ultrasound urology. Thus, it greatly complements GE's ultrasound business. That is important because ultrasonography is one of GE Healthcare's fastest-growing businesses. For instance, management has drafted a mid-single-digit growth rate for its ultrasound business, compared to a low- to mid-single-digit growth rate for the entire healthcare business.

Moreover, GE Healthcare is probably the industry that would get the highest rating if traded as an independent company. For example, GE's closest competitor, Germany's Siemens Healthineers, trades at a higher valuation (Wall Street analyst consensus) of enterprise value (market value plus net debt) to earnings before interest, taxes, depreciation, and amortization, or EBITDA.

In short, GE is accelerating growth in one of the fastest-growing divisions and the highest-rated business.

For Culp, taking the helm in October 2018 must have been like playing a game of closed position chess with former world champion Anatoly Karpov. Heavily mired in debt and with limited scope for movement, the open option was to start a series of asset sales to reduce debt while gradually improving the position by repositioning the business.

As a result, GE sold its biopharmaceutical business to Danaher (formerly Culp`s company) for a net price of about $20 billion; its aircraft leasing business, GECAS, for $24 billion; and several others.

It's been a long time since GE has been in a position to make meaningful acquisitions. It worries the industrial conglomerate because investors are relying on management to invest in parts of the diversified business that will grow -- one of the advantages of diversification. That is also a concern because GE tends to produce large products that require a significant upfront investment, such as aircraft engines, gas turbines, wind turbines, and imaging equipment.

Thus, the deal with BK Medical gives investors confidence that GE's financial position is now sound and management can invest in growth. That is especially important given that Culp has built its reputation at Danaher by making some successful acquisitions and applying several continuous improvement and lean management practices to improve the efficiency of these businesses. Investors will hope that he can do the same for GE .

The investment also suggests that GE is unlikely to sell its health care business anytime soon. Former CEO John Flannery (who previously ran GE Healthcare) had planned to spin off the company into a separate company to raise money to pay down debt, but those plans were abandoned in favor of selling the biopharmaceutical business.

In addition, this deal would lower expectations for the sale of the rest of GE Healthcare (imaging, ultrasound, health systems, pharmaceutical diagnostics, software, and solutions).

This makes sense, given that GE will need the profits and cash flow from GE Healthcare to support GE Aviation, which is recovering from the impact of the COVID-19 pandemic on commercial flights, and GE Renewable Energy, which is building its offshore wind turbine business virtually from scratch in 2021.

To be sure, GE Healthcare will face some near-term headwinds due to ongoing supply chain issues, which will likely extend into the first half of 2022. Nevertheless, as Culp noted recently at the Morgan Stanley Laguna Conference, there are no end-market demand issues.

Thus, once GE overcomes the difficulties associated with restarting production, we can expect BK Medical to start helping GE accelerate the growth rate of the healthcare segment to mid-single-digit rather than low-single-digit levels. Given how highly valued healthcare companies are, this could have a significant impact on the stock price for years to come.

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