Novice Investing - Nice Return for Plastic

Date: Monday 01st 2008f December 2008 04:13:57 PM

Nice Return for Plastic - 05/22/2007

By: Novice Investing Staff

General Electrics Co. (GE) had shown its desire to rid its Plastic unit back in January 2007. With around 24% of its revenue getting squeezed by high material cost (mainly Benzene), GE feels that other revenue drivers such as financials made more sense than the plastic units. Thus, on Monday 22th May 2007, General Electric announced that it has sold its plastic business to Saudi Basic Industries Corp for $ 11.5 Billion. In 2006, the unit produced $ 6.6 Billion in revenue and $ 738 Million of operating profit. Therefore, the price tag of the plastic division is 1.74 times revenue and 15.6 times profits.

Compared with other chemical business, GE plastic unit is richly valued. Dow Chemicals Co. (DOW) for example, is valued at 0.89 times revenue and 10 times operating profit. Not to mention that Dow is getting into a high margin chemical business. Other chemical companies such as Dupont (DD) is getting similar multiples.

Meanwhile, GE as a whole is getting valued at 2.33 times revenue and 8.5 times operating earnings. This is much lower than what the Plastic business fetch. Therefore, getting $ 11.6 Billion for its Plastic units is a very good deal for GE indeed.

Meanwhile, the net proceed for GE is $ 9 Billion, which would be used to increase its stock buy back, among others. As for other business expansion, GE is quite big to produce meaningful revenue with $ 9 Billion in capital. That doesn't mean GE will stop growing, however. It is just that size has started to make it harder for GE to grow faster as it used to.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding General Electric Co. (GE) or any other securities.

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