Although we don’t believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes — just in case they’re material to our investing thesis.
After the U.K. Parliament voted against a military strike against Syria yesterday, the momentum for retaliatory action against the Assad regime has slowed. This may have helped prevent another slide in U.S. stocks this morning. The S&P 500 and the narrower, price-weighted Dow Jones Industrial Average are relatively flat this morning, down 0.17% each as of 10:05 a.m. EDT.
Nevertheless, with its credibility on the line, the Obama administration seems determined to see this through. I believe the odds of imminent military action remain high.
GE says “no mas” to consumer credit
Now it’s time to highlight a good old fundamental stock story. The front page of this morning’s Wall Street Journal features an article headlined “GE Set to Exit Retail Lending,” according to which financial-industrial conglomerate and Dow component General Electric Company (NYSE:GE) is preparing to divest its U.S. consumer lending business, part of financing arm GE Capital.
The U.S. consumer finance business issues store credit cards — including one on behalf of Walmart — to 55 million Americans and represents roughly $50 billion in loans outstanding.
In the wake of the credit crisis, General Electric Company (NYSE:GE) has sought to reduce the proportion of profit that GE Capital contributes to the overall pie. While that process is ongoing, the proportion remains substantial — 45% in its most recent quarter. CEO Jeff Immelt wants to reduce that number to 30%.
Speaking of Mr. Immelt, he needs to look busy, as he’s under a certain amount of pressure. Why? Just take at the share graphs: General Electric Company (NYSE:GE) has underperformed its conglomerate peers Honeywell International Inc. (NYSE:HON) and United Technologies Corporation (NYSE:UTX) and the S&P 500 year to date, over the past 12 months, and over the trailing five- and 10-year periods!
Part of that underperformance is attributable to investors’ unwillingness to award the same multiple to a business that derives a substantial proportion of its earnings from lending activities. As of yesterday’s close, the market was valuing General Electric Company (NYSE:GE)’s shares at 13.4 times the estimate of the next 12 months’ earnings; Honeywell International Inc. (NYSE:HON) and United Technologies Corporation (NYSE:UTX), on the other hand, both sport multiples closer to 16.
Will spinning off the U.S. consumer finance business help bring General Electric Company (NYSE:GE)’s multiple in line with its peers? It’s a step in the right direction, which is important, because in a low-growth environment, multiple-expansion could be a useful source of returns over the next several years.
The article GE Wants Out of Consumer Credit originally appeared on Fool.com and is written by Alex Dumortier, CFA.
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