Morgan Stanley: General Electric Hopes To Squeeze Revenue From Software

With General Electric Company's GE recent quarterly revenue growing just 1 percent, the industrial conglomerate is touting a plan to make the sale of data monitoring services an increasing part of its business.

GE currently gets about 45 percent of its revenue from monitoring and servicing the aircraft engines, turbines, medical gear and locomotives it's already sold. The company figures it can expand the use of its monitoring software platform, called Predix, and sell related data-monitoring service to other industrial companies.

If Predix becomes an industry standard, "we've heard investors draw parallels with Microsoft in the early days of the PC operating system," Morgan Stanley's Nigel Coe, who rates GE Equal-Weight with a $28 target.

But other companies are already in the business, including Rockwell Automation and United Technologies.

Coe figures the strategy could add $600 million annually to GE's revenue over the next three years; That's about 0.4 percent of GE's $146.05 billion in revenue last year.

But it was enough potential growth to bring Chief Executive Jeffrey R. Immelt and the leaders of each of GE's major business lines to spend a full day talking up the plan with investors recently.

"Management frequently referred the 'Power of 1 percent' during its presentation," although 1 percent happens to be the rate GE recent third-quarter revenue growth, Coe said, the slogan referred to efforts to squeeze additional revenue from its software platform

GE revenue has been roughly flat in each of the past five years while shares are down 11 percent so far in 2014. The company is pursuing a slimming-down strategy by spinning off its consumer finance unit Synchrony and dumping its consumer appliance business Whirlpool.

Coe said profit margins on GE's service business have widened in the past decade, while those in its equipment manufacturing business have narrowed.

"We think it was telling that Jeff Immelt views GE increasingly as a software and analytics company," Coe said.

GE traded recently at $25.06, up 0.9 percent.