General Electric (GE) Shrinks its Capital Finance Business

Shares of General Electric Company (GE) closed down $0.53 or 2.02% to $25.71 per share in Tuesday's trading session, but adds some cents in after-hours trading while still below the level of the previous day.

General Electric operates as an infrastructure and financial services company. It sells products ranging from jet engines and gas turbines to consumer appliances, railroad locomotives and medical equipment. ­

On July 17, the company announced earnings and revenues for the second quarter that beat Wall Street expectations and rallied that day.

It reported a loss of $1.36 billion, or $0.13 per share, down from a profit of $3.55 billion, or $0.35 per share, in the same quarter a year ago. After making adjustments for discontinued operations, the firm's operating earnings were $0.31 per share and higher than the Street's expectation. Revenue increased by 1.5% to $32.75 billion and also beat expectations.

Until that moment, the stock returned 7.4% in a year-to-date basis, but now it does not even reach a 2%. The obvious question is what happened in the last days.

On Tuesday, the company announced it will sell its health care lending unit and related loans to Capital One (COF) for almost $9 billion and is expected to take place in the fourth quarter. The deal includes $8.5 billion of healthcare-related loans along with the U.S. lending business. "This announcement is the next step in GE's transformation to a more focused industrial company," said GE Capital CEO Keith Sherin. For Capital One, the deal aims to increase will bolster its healthcare lending operations. "This addition will catapult us to a leading market position in providing financial services to the healthcare sector," said Michael Slocum, president of Capital One's Commercial Bank.

This is in line with General Electric's plans to focus on its industrial businesses and the desire to move to a less financial company. However, the industrial segment revenues were flat at $33.09 billion in the last quarter reported.

In addition, the company said that it is selling $600 million of the unit's real estate equity investments to another buyer but still remains the secret.

Hedge funds have bullish sentiments on the stock, with Ken Fisher's Fisher Asset Management holding 30,714,337 shares in the second quarter of 2015, after having increased his position by 1.19%. Another prominent investor like Warren Buffett holds a large stake too.

The stock has a consensus analyst price target of $28.82, an implied upside of 12%, plus a 3.5% dividend yield.

Published on Aug 12, 2015
By Omar Venerio
Capital Markets, Derivatives and Financial Management Professor, Master in Finance and CFA candidate. I am an independent trader of stocks and options and passionate about the stock market.

Copyrighted 2016. Content published with author's permission.

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