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GE and other conglomerates ready to deal again Print E-mail
Saturday, 30 January 2010

By Ronald Fink

Diversified industrial companies are now in solid enough financial shape to make acquisitions or at least boost dividends and fund stock buybacks, according to a report published on Thursday.

Conglomerates such as 3M, Cooper Industries, Danaher, Dover, Emerson Electric, General Electric, Honeywell, Illinois Tool Works, , Parker Hannifan, Rockwell Automation, Textron, and United Technologies have paid down debt, cut capital spending and saved cash by liquidating inventories to the point where they can now take more aggressive steps to grow their businesses, an analyst for the research firm CreditSights wrote.

"Strong free cash flow was used in a conservative fashion to moderately reduce debt levels, continue paying dividends and engage in a much-reduced level of share buybacks and acquisitions," wrote Hitin Anand, referring to the group's actions since the onset of the financial crisis in 2008.

Although the companies' net long-term debt as a percentage of earnings before interest, taxes, depreciation and amortization, on average, has risen in the past year, to roughly 7 times as of last September from closer to 6 at the end of 2008, that's still well below the 7.5 percent seen in 2007.

The improvement reflects a number of moves, including a significant reduction in the use of debt to fund share repurchases. According to CreditSights, the companies' buybacks as a percentage of free cash flow has declined by half since 2007, from roughly 120 percent to 60 percent.

Meanwhile, cash flow has improved. While the companies didn't slash capex in the most recent downturn as much as they did in 2002, it still fell 20 percent, to 2.5 percent of sales. And inventory reductions kept the hit to free cash from significantly lower revenue to a moderate 5 percent.

As a result, the companies are now positioned to fund more aggressive strategies, Anand contends. "These are solid credit protection measures especially in the context of the down cycle," the analyst wrote. "This balance sheet dry powder along with continued access to the capital markets may very well come into play for M&A activities in 2010."

While Anand ruled out rapid growth in capex, the analyst said "stable to moderate growth" was likely.

Anand also said lingering concerns about exposure to continued troubles in the loan market for those companies with large financial subsidiaries, such as GE and Textron, were somewhat overblown, thanks to divestitures, equity raises and dividend cuts.

"Overall, the worst of the fears around asset quality and charge-offs are also behind them, although some pieces of the business may still see some weakening before any improvement," the analyst wrote.

In the case of GE and its finance subsidiary, GE Capital Services (GECS), Anand observed that "immense financial flexibility driven by a minimally leveraged industrial balance sheet, strong free cash flow generation and expected proceeds from recent divestitures" put the company in a position to "not only accommodate higher GECS losses, but also still run a balanced financial attack."

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