GE turns to 'Plan B'

Why one of America's largest,
most-successful companies is
completely changing direction,
and how you can beat it to the punch ...

In what’s starting to be seen as a bit of an “about-face” for one of America’s biggest companies — and perhaps for the whole U.S. economy at large — the massive conglomerate General Electric (GE) shelled out $3.3 billion to capitalize on the oil-drilling boom by acquiring Lufkin Industries (LUFK).

The capital came straight from GE’s recent sale of NBC Universal back to Comcast (CMCSA); a deal that was announced just over a month ago.

Taken together, these two acquisitions paint a pretty clear picture of GE’s direction into the future. The company is taking broad steps to move away from media and financial services, and back to its roots in energy and infrastructure.

So the obvious question then, is should your portfolio be following suit?

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But before we get into the deeper implications of it all, let’s take a look at the deal ... and see what $3.3 billion will buy you these days ...

Lufkin — the new acquisition — has 4,500 employees in more than 40 countries, making artificial lift equipment used to bring crude and other materials to the surface.

Might not sound like all that much, but it’s a kind of service that some 94% of all existing wells will eventually need. And according to the CEO of GE Oil & Gas, “This gives us more of a chance to become a comprehensive player.”

But that kind of advantage doesn’t come cheap.

GE is paying a 38% premium to Lufkin’s closing price on Friday, valuing the deal at $88.50 per share in cash.

GE is paying slightly more for Lufkin compared to other deals in the sector. GE is paying 13.5 times 2013’s EBITDA, vs. an average of 11.5 times EBITDA paid in 30 similar deals over the past decade.

  

The acquisition fits nicely with GE’s view of serious future growth in the oil pump market.

  

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And so far, the change in direction is paying off just fine for GE.

Oil and gas has quickly become GE’s fastest-growing segment, with sales up 57% since 2009 to $15.2 billion. GE’s energy segment now accounts for 10% of its total revenues.

If there is a shale oil boom headed our way, then GE will certainly be one of the first big names to cash in.

GE is also likely looking to use its acquisitions to capitalize on the quickly-growing natural gas market in the United States. Natural gas prices are now up more than 90% over the past year and continue to trend higher.

CEO Jeffrey Immelt told analysts last fall that natural gas development “is the place to play both in terms of the U.S. and the rest of the world.”