TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: General Electric (NYSE:GE) plans to sell off most of its GE Capital unit. So, what does it mean for the new GE and investors in one of the most widely held stocks anywhere?
No stone unturned. How Blackstone, the private equity giant, is becoming a real estate behemoth as well.
And a little love. Our market monitor says she has some of the best names to own. They’re the ones investors love to hate sometimes and she’s got names for you.
All that and more for Friday, April 10th.
Good evening, everyone, and welcome. Sue Herera has the evening off.
Well, talk about ending the week with a bang. General Electric (NYSE:GE) is continuing its makeover and in this case, it’s an extreme makeover.
Last night, we told you the widely held Dow component was close to a deal to sell its real estate portfolio. What we didn’t know was that that was just the beginning. The company is planning to essentially shed its entire finance unit. The first move is a $26.5 billion sale of most of its real estate and mortgage portfolio to Blackstone and Wells Fargo (NYSE:WFC).
But GE is not stopping there. The company will dramatically slim down GE Capital over the next few years and buy back $50 billion worth of stock. That buyback ties Apple (NASDAQ:AAPL) for the biggest single buyback ever.
Wall Street loved the moves and sent shares higher by about 11 percent on the day.
Mary Thompson has our look at the deal and the new GE.
MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: In its most aggressive move in 14 years of CEO, Jeff Immelt plans to slash the size of GE’s finance unit, a business once a strength for GE now seen as a drag now.
JEFF IMMELT, GENERAL ELECTRIC CEO: We kind of felt from an investors’ standpoint this was the right time.
THOMPSON: The right time because low rates mean yield hungry buyers pay for these assets and selling them means GE may be clear to come out from a stricter regulatory regime mandated for firms deemed systemically important. The news sent the stocks to a 52-week high, earning praise from investors.
JEFFREY SAUT, RAYMOND JAMES: I think GE is doing the exact right thing.
JAMES LEBENTHAL: Now, you can understand the company.
THOMPSON: For Immelt, the restructuring puts GE on the path to be a pure industrial play, a company providing tools to build out infrastructure around the globe and one that won’t be penalized for its financial business.
IMMELT: At the end of the day, being able to rerate the company is a premium industrial company with a very small financial service business that really complements the industrial assets I think is the highest — is really a value-creating move.
THOMPSON: Value Immelt struggled to generate as the stocks off 30 percent since he took the helm.
MATTHEW RODDY, ROCKLAND TRUST: I think he heard the critics and he’s answering them.
THOMPSON: By 2018, 90 percent of GE’s profits will come from its core industrial businesses, including power and water, aviation, health care, oil and gas and transportation. That’s up from just over 50 percent last year.
Profits from finance will drop to 10 percent from 42 percent in 2014, as GE looks to unload $165 billion in assets, including U.S. and international banks and global, commercial and consumer lending businesses all over the next two years.
GE will hold on to businesses that finance client purchases of its jet engines, energy and health care equipment.
(on camera): Even as it undertakes this massive restructuring, GE still expects to be profit forecast for 2018. It will make up for lost earnings at GE Capital by growing profits at its industrial businesses and with a record $50 billion stock buyback program that will significantly shrink its shares outstanding.
(voice-over): All moves designed to keep investors engaged as the 123-year-old company starts yet another new chapter.
For NIGHTLY BUSINESS REPORT, I’m Mary Thompson.
MATHISEN: So, why would a company want to part with a unit, GE Capital, that accounts for $2 out of every $5 it earns in profit?
Bill George is here to discuss. He’s former CEO of Metronic and now professor of management practice at Harvard Business School.
Bill, great to have you back. Take us inside the mind of the CEO, inside the board room. Why do you do this?
BILL GEORGE, FORMER MEDTRONIC CEO: Well, I think, Tyler, Jeff is taking GE back to roots. So, getting transportation, energy, health care, industrial businesses where it can use its research and development, its capital expenditures and, by the way, its financing clout on industrial roles.
But the consumer finance business has gone the wrong way. It’s very hard to get good returns today, in the new regulatory era we’re in this field, practically, if you’re not a bank the size of Wells Fargo (NYSE:WFC). And I think that getting rid of the real estate, these things really made GE into a conglomerate and I think the market couldn’t figure it out and I think a lot of customers couldn’t figure it out. So, I think it’s good.
The conglomerate model, we didn’t challenge it under Jack Welch because he was managing so well. But I think today, it doesn’t make sense. And so, I think the integral unity it has makes a lot of sense and keeping the financing. Jeff once told he came to visit me in Medtronic (NYSE:MDT) when he was in charge of the whole imaging business and he said, look, we use the financing to support our sales of MRIs and CAT scanners and all the equipment they sell.
And so, the same is true in jet engines, the same is true in the energy business. They use these very effectively. But that’s different than the consumer finance and I think GE got way too dependent back when Jack was CEO. The only question I have, Tyler, is why didn’t he do it sooner?
MATHISEN: Well, a lot of people ask the same question particularly in light of what’s been an underperforming stock price. So, in this case, Bill, it gives them more sort of strategic focus. Smaller is better. They won’t have as much profit now. They’re hoping, I guess, that they’ll have it later on.
Do you see — you mentioned the medical imaging business, some people see that now as not fitting as well as it once did, in a company that is focused on industry and infrastructure.
GEORGE: Well, I wouldn’t agree with that. I think GE should be doing more, not less than health care. I think the opportunities, Tyler, as a growth industry, health care is where it’s at. Energy is, too, by the way. And I think using their technology and their innovation and the kind of things he did in the energy side, ecoimagination, same thing with health care, Tyler. That’s their sweet spot.
This is the real GE that just is taking the company back too and I think that’s exactly where they should be and they should be pushing large equipment. That’s what GE does, kind of like Medtronic (NYSE:MDT) does implantables. So, this is what they do well and I see no reason why they wouldn’t continue to try to do this around the world and build their global business in a rapidly growing market.
MATHISEN: And this is now Jeff Immelt’s company totally. He got rid of NBC Universal (NYSE:UVV), which, of course, produces and owns CNBC, which produces this program, and also now a big part of the Welch legacy of the old General Electric (NYSE:GE), right? Quick thought?
GEORGE: Well, I think Jeff was too slow on that. But I have some (INAUDIBLE). I think he feels he needed to bring — he knows the lead time to develop the innovation, new ideas, and he needed — he wanted to go to a slower transition. I wish he had done it sooner than 13 1/2 years.
GEORGE: Certainly in the NBC side. A few years ago, I thought get rid of NBC and that made good sense. And I think now, this makes sense. He could have done it a few years earlier but he’s basically restructuring his balance sheet too. He’s downsizing, but he’s taking a lot of capital off the table.
MATHISEN: All right.
GEORGE: And he’s doing a lot in that regard. So, he’s giving his shareholders something closer to industrial high-tech pure play and that’s where Jeff wants to go, that’s his background and I think it’s the absolute right thing to do because most of GE’s executives come out of these fields.
GEORGE: And so, I think you’ll see the company be much more of a success in the future and I think its customers, its employees and shareholders will rally around the new GE not being caught up in the ego of being the biggest, but being caught up in being the biggest niche in their fields, to being really excellent in having an integrated strategy as they now have. So, kudos to Jeff.
MATHISEN: All right, Bill. Thank you so much for being with us, always enlightening. Bill George with Harvard Business School and a former CEO.
So, what does this mean for investors?
Deane Dray follows GE for RBC Capital Markets.
Deane, welcome. Good to see you.
What do you think? They fell in love with this move today. Are they going to stay in love?
DEANE DRAY, RBC CAPITAL MARKETS: Well, Tyler, you don’t see big cap stocks of GE’s size going up almost 11 percent. There was — this was a catalyst and I think what you’re also is important of what happened today is there are so many PMs that were underweight or naked GE and it’s a big index stock.
And suddenly, you get a catalyst and it causes, you switch from greed into fear, and you had almost panic buying. We call this a melt-up. Stock was almost 10 times its average daily volume.
MATHISEN: How do you feel about this stock three years down when they have exited some of the businesses that Bill and I were just talking about?
DRAY: Well, it was actually — Bill was making some great points. If you project and follow through this whole plan, and do these buybacks, you then pare GE down to really its core business that I think resonate well with investors. Big industrial service-based businesses with a healthy dividend and investor-friendly and you de-risk the company significantly. I think that’s what the market telling you today.
MATHISEN: What rating do you have on the stock and I note that you had earlier a $28 share price target. Will you revisit that?
DRAY: Sure. We have an outperform rating on GE. And interesting in the beginning of the year, we named GE as our top pick of stocks most likely to make a transformational portfolio change. What surprised us and I think what surprised the market is they did it all at once. It wasn’t just the next phase.
So, we’re looking at this now and price targets under review. We still feel very good about how the company has laid out this plan. If you want to project out three years, you start looking at a stock that’s growing 10 percent, pays 3.2 percent dividend yield that has been de-risked, that feels in this low growth environment actually nice.
MATHISEN: That’s really good. And I should have pointed out that you guys had impression calls on General Electric (NYSE:GE) back earlier this year in terms of transforming transaction of the sort announced today.
DRAY: Thank you, Tyler.
MATHISEN: All right. Thank you, Deane. Great to be with you.
DRAY: Appreciate it.
MATHISEN: As we said, Blackstone, the private equity firm was one of the buyers of GE’s real estate today. The company also made another deal buying real estate investment trust excel for $2 billion, and that expands its rapidly growing mark as a global, real estate powerhouse.
Diana Olick takes a look.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: There is no real estate Blackstone doesn’t touch. Landmark offices, apartment buildings, single family rental homes, medical buildings, student housing, hotels — $81 billion worth of investor capital under management.
Now, as part of GE’s house cleaning, Blackstone adds $14 billion more.
RYAN SEVERINO, RDS ECONOMIST: In this market environment, it’s very difficult to place a lot of money all at once, and given the amount of money that someone like Blackstone is clearly looking to put to work in the market, it would be very difficult to cobble together a portfolio of that magnitude one or two properties at a time.
OLICK: About $3 billion in office properties in Chicago, southern California and Seattle, as well as billions more in commercial properties and mortgages across Europe, Australia, and Mexico.
SEVERNIO: They must have a relatively bullish outlook on the sector overall, otherwise, we wouldn’t be talking about the kinds of dollar volumes that they’re clearly talking about in this case.
OLICK: Blackstone has been in the news most recently in its hotel maneuvering after its $26 billion leveraged buyout of Hilton Worldwide in 2007, it took the company public again late last year. That was just after its sale of San Diego’s landmark Hotel Del Coronado early last summer, which Blackstone’s real estate chief Jon Gray described to CNN’s David Faber.
JONATHAN GRAY, BLACKSTONE HEAD OF GLOBAL REAL ESTATE: The nature of our business, we have to sell. We have closed in funds. We say our motto is buy it, fix it, sell it.
OLICK: Blackstone is now the nation’s largest landlord in the single family rental market, with more than 45,000 properties under its invitation homes. It continues to buy distressed properties albeit at a slower pace.
GRAY: At the peak, we were at much as $150 million a week.
OLICK (on camera): Blackstone is taking advantage of a real estate market that’s still in the early stages of recovery. With the exception of red hot apartments, most sectors still have a long runway ahead, with plenty of potential for profit.
For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.
MATHISEN: Back above 18,000, that’s where the Dow Jones Industrial Average ended today. And it largely had GE to thank for it.
The Dow Jones industrial is up 98 points to close at 18,057. NASDAQ grows 21 points to, within a hair or so, of 5,000 again. And S&P 500 notched a gain of 10 points, and that puts it back above 2,100. For the week, all three indexes were up more than 1 1/2 percent.
Well, it could well be the highest level meeting between the two countries in more than 50 years. President Obama coming face to face with Cuba’s leader, Raul Castro, at a summit in Panama.
Michelle Caruso-Cabrera has more on this historic moment.
MICHELLE CARUSO-CABRERA, NIGHTLY BUSINESS REPORT CORRESPONDENT: The president arrived in Panama last night and we learned today that he spoke with Raul Castro over the phone on Wednesday, and that he and Castro are expected to see each other at the opening dinner which begins tonight at 9:00 p.m.
Tomorrow is the big event, though, when the two are expected to actually hold a discussion, though, not an official meeting.
BEN RHODES, DEPUTY NATIONAL SECURITY ADVISER: We certainly do anticipate that they will have the opportunity to see each other at the summit tomorrow to have a discussion. So, we will keep you updated as to any interaction between the leaders.
CARUSO-CABRERA: This wouldn’t be the first time the two have met. They shook hands very briefly in December of 2013 when both were in South Africa for Nelson Mandela’s funeral. President Obama’s chief of staff said at the time that that meeting was not planned.
This meeting will be the first time they are together since they announced the decision to reestablish diplomatic relations in December.
One of the key issues, Cuba’s inclusion on the U.S. list of state sponsors of terrorism. Removing Cuba one of the changes that would pave the way for reopening of embassies which have been shut for 54 years.
It will also make it much easier for banks around the world to do certain kinds of financial transactions with the sanctioned island. And just last night, the State Department officially recommended removing Cuba from the list. It’s been on the list since 1982, when it provided sanctuary to terrorists, including Colombian FARC rebels and members of Eta, which is a vast separatist movement in Spain.
Other countries still on the list — Iran, Sudan and Syria. By the way, Raul Castro is the first Cuban leader to attend the summit of the Americas because the U.S. has historically opposed a Castro attending the event. So, we are already seeing changes and hemispheric relations.
For NIGHTLY BUSINESS REPORT, Michelle Caruso-Cabrera.
MATHISEN: The one person who has long been a supporter of improving relations with Cuba — Hillary Clinton. And the former secretary of state and first lady is expected to announce on Sunday that she will enter the race for president in 2016. It is believed Clinton will make her announcement via social media.
Coming up, our market monitor loves cost-cutting companies. She’s got a couple of names she thinks going to get you at least 20 percent over the next few years.
MATHISEN: The Apple (NASDAQ:AAPL) Watch hits stores for the first time today. Not that you could buy one at a store. Preorders only and those orders had to be made online. But in the store, you could get a chance to se try one on, put it through its paces. And by all accounts, the watch appears a success. Within hours, most if not all models seem to be totally spoken for. If you want one, now figure on June at the earliest.
In China, the top of the line model, which costs in the neighborhood of $20,000 took less than an hour to sell out. Around the world, people lined up to test out the new gadget.
(BEGIN VIDEO CLIP)
UNIDENTIFIED FEMALE: We’ve come to see the watch.
UNIDENTIFIED MALE: I ordered the watch last night at like 3:15 a.m.
UNIDENTIFIED FEMALE: We hadn’t bought one but probably going to come back and get one.
UNIDENTIFIED FEMALE: My kids are asking for iWatches and I’m like no.
UNIDENTIFIED FEMALE: If it’s like an iPhone, is it going to be updated every year?
UNIDENTIFIED FEMALE: Some people are skeptical now, but I think in time to come, everyone will have one.
(END VIDEO CLIP)
MATHISEN: Shares of Semantic rallying into the day’s close on a late report. And that is where we begin tonight’s “Market Focus”.
The company is reportedly exploring a sale of its Veritas data storage and recovery business. The cyber security company’s unit could fetch more than $8 billion. Shares were 5 1/2 percent higher. They finished at $25.58.
New details tonight on eBay’s split from its PayPal unit. The two company’s will still be interdependent on one another, even after they split. eBay (NASDAQ:EBAY) agreed not to create its own payment system for five years after the split, and PayPal won’t create an online market place. So, there. Shares were up a fraction to $57.34.
Amazon (NASDAQ:AMZN) once step closer apparently to its dream of delivering items with drones. The company won federal approval to fly drones to research and develop the technology, but there are a lot of restrictions. They can’t fly higher than 400 feet, faster than 100 miles per hour, that’s pretty fast, and they have to stay within the operator’s line of sight. They’re also only allowed to fly during the day and on private property. So, the company still has a long way to go before they can fly you your next shipment of cat food. Shares were off a fraction to $382.65.
Nokia (NYSE:NOK) is reportedly exploring the sale of its maps business. The unit is attracting interest from Uber, the car-booking application and private equity firms. The business is valued at about $2 billion. Shares popped 4 percent to $8.06.
Shares of Tekmira also higher on an FDA approval of a drug. The drug maker now has the OK to continue its clinical trials of an Ebola treatment drug. Last July, regulators put the drug on hold until more information could be provided on safety and efficacy. The stock popped more than 3 percent to $18.19 was the close there.
And our market monitor tonight has some unloved stocks she thinks investors should own in their portfolio. She’s Diane Jaffee, senior portfolio manager at TCW, an asset management firm with $180 billion under management.
Diane, welcome. Good to have you with us.
DIANE JAFFEE, TCW SR. PORTFOLIO MANAGER: Thank you, Tyler. Good to be here.
MATHISEN: Let’s start by just sort of a rundown of your overall view of the market at today’s levels of two weeks in a row of gains. We haven’t seen that in quite a while and back above 18,000, close to 5,000, 21,000 on the S&P.
JAFFEE: I was glad that the market paused during the first quarter to let the commodity prices sink in and let companies figure out how they were going to react. And now, I think that we’re going to be very interested to see what the first quarter earnings brings and I think the market is stronger from here.
MATHISEN: What do you think first quarter earnings are going to bring and will the rising dollar be the excuse du jour?
JAFFEE: I think the dollar will definitely have an impact but when we talk to companies with overseas sale. They would much rather have a stronger Europe, a stronger Japan to sell their products to.
MATHISEN: All right. Let’s move on to some of your picks.
You liked GE before, let the record show. You own it before today’s news. Do you love it even more now?
JAFFEE: I do. I would hardly — it’s one of the largest positions. We still believe there’s at least 20 percent upside. It’s selling at 2.2 times price to book, and it’s now reaching the point where in terms of dollar prices and it hasn’t seen since the crisis.
MATHISEN: You must feel very good today because it’s been a long wait for GE.
JAFFEE: I feel good for our clients.
MATHISEN: All right. Good enough.
Let’s move on to your next one, which is another long-time unloved stock and that’s Citi.
JAFFEE: Yes. And that isn’t having much love this year, but we think it too is continuing its restructuring plans in terms of asset sales in Central America and Eastern Europe. And it’s trading below book value. And so while, you know, it passed the CCAR, the stress test earlier this year, we think it has room to run over the next one to two years.
MATHISEN: And your third one is Chesapeake Energy (NYSE:CHK). A stock which either has a history or a past.
JAFFEE: We’re gingerly pacing our investments in Chesapeake right now. It’s trading below price to book. Generally A&P companies trade better on cash flow. It’s trading at 2.5 times price to cash flow, and what I feel good about is that it has over $8 billion of money in the bank. So, it can wait out long-term low commodity environment.
MATHISEN: Is your investment in Chesapeake an expression of bullishness about the sector broadly or about the particulars of this company?
JAFFEE: We have been underweight energy for most of 2014 and continue to be underweight energy in ‘15. But we want to take opportunities that the market is presenting like Chesapeake.
MATHISEN: All right. Diane, thank you very much. Great picks and thanks for moving quickly through them. We appreciate it.
JAFFEE: Thank you, Tyler.
MATHISEN: Diane Jaffee with TCW.
All right. Citi upgrading Netflix (NASDAQ:NFLX) to buy from neutral. That lifted shares of the video streaming service. The notes saying it doesn’t agree with the competition concerns that are already reflected in the stock price. Price shares rose about 3 1/2 percent to $454.67 on Netflix (NASDAQ:NFLX).
Citi adding General Motors (NYSE:GM) to its Citi focus list, sending shares higher today. The firm says it sees the recent pullback in the stock as a buying opportunity and says the company has very strong very fundamentals. Shares up slightly today to $36.57.
Coming up, breaking up can be hard to do but some visionaries are trying to ease the pain of divorce, while trying to build a business.
MATHISEN: Here is what to watch next week, busy week. Earnings season in full swing. The biggest part of it, the big banks start reporting early in the week. JPMorgan (NYSE:JPM), Wells Fargo (NYSE:WFC) and many, many more. The Federal Reserve’s Beige Book, love that Beige Book, out Wednesday and could offer some insight on the health of the economy.
On the data front, a ton of potentially market-moving reports, including retail sales, housing starts, jobless claims, and those, folks, are some of the highlights of next week’s agenda.
And finally tonight, divorce can be a messy business, but as Jane Wells tells us, some people are turning that messy business into good business.
JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: The luxurious Gideon and Putnam Resort in New York Saratoga Springs is a favorite spot for weddings. It’s also the spot where Katherine and Jonathan who don’t want their last names used got divorced.
KATHERINE AND JONATHAN, DIVORCE HOTEL CLIENTS: It definitely suited our needs. We have children and early on in this process, we made a decision to be the best parents possible.
WELLS: The resort is the first U.S. venue for the divorce hotel, already a successful company in the Netherlands. Its purpose? Low priced quickie divorces for 10 grand. Check in, marry on Friday and check out, divorced on Sunday.
MICHELE MARTIN, THE DIVORCE HOTEL MEDIATOR: We launched in September of 2014 and since then, we’ve done 12 divorces. We just finished our 12th yesterday.
WELLS: This isn’t the only unusual business in the divorce industry. Another company will finance your divorce battle in exchange for a piece of your settlement, assuming you get one.
Balance Point Divorce Funding was created by Stacey Napp who funded it with her own divorce settlement.
STACEY NAPP, BALANCE POINT DIVORCE FUNDING: We haven’t lost money on a case yet, so it will happen. I am sure it will.
WELLS: With Balance Point, a lawyer estimates how much a divorce will cost, Napp funds it in portions and the more she invests, the higher her percentage on the back end. But she never goes above 25 percent. She won’t, however, fund everyone.
NAPP: I’ve actually had somebody say to me, I won’t settle ever. And I said, really nice meeting you. I can’t do anything for you, because at the end of the day, it has to be about business because I have investors to answer for.
WELLS: Those running the divorce hotel agree — this is only for people who want to end things quickly and relatively painlessly.
KATHERINE AND JONATHAN, DIVORCE HOTEL CLIENTS: It was nice to get away for a weekend in the beautiful setting where you can relax, get away from family, friends, and really focus on what needed to be done.
WELLS: And though it can be romantic spending the weekend here, no one has had second thoughts.
MARTIN: Every couple has left saying they’ve gotten along better than they ever have, but they’re not getting back together. They’ve made that decision.
WELLS: For NIGHTLY BUSINESS REPORT, I’m Jane Wells.
MATHISEN: Heartbreak hotel maybe, the divorce hotel.
All right. That’s it for NIGHTLY BUSINESS REPORT for tonight. I’m Tyler Mathisen. Thanks so much for watching. We hope you all have a really good weekend and we’ll see you back here on Monday.
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