We do not intend to alter our fair value estimate of $32 per share for wide-moat General Electric (GE) after reports by the Wall Street Journal that the company intends to sell its consumer-focused lighting business for an estimated $500 million. The segment had been rumored up for sale since GE restructured its lighting business in late 2015 to focus more heavily on commercial and industrial LED applications. In particular, an internal startup branded Current, which was officially launched in October 2015 with approximately $1 billion in revenue, is meant to combine GE’s LED, solar, energy storage, and electric vehicle offerings with GE’s Predix platform in greater pursuit of industrial Internet applications.
In total, GE’s lighting business represented about $2.3 billion in revenue at the end of 2016, or 2% of GE’s total industrial sales of $113 billion; however, we estimate that the consumer lighting business up for sale represents less than 10% of the segment’s revenue. As such, we believe it will have an immaterial impact on our fair value estimate should the deal go forward. Nevertheless, the move is consistent with GE’s recent push to leave consumer focused businesses behind in favor of focusing on a wider frontier of industrial applications. The consumer lighting segment has been managing through the secular decline of incandescent bulbs--the last bastion of GE’s Edison era--in favor of fast-growing LED technology. That said, it is difficult to get consumers to pay a premium for lighting solutions in this commoditized marketplace. We see GE’s focus on integrated energy management and lighting solutions for corporations and institutions as an opportunity to grow recurring aftermarket service revenue in addition to the development of differentiated technology, both of which could strengthen moat-building customer switching costs over time.
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