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General Electric's Transportation Unit to Merge With Wabtec

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General Electric Company GE recently entered into a definitive agreement with Wabtec Corporation WAB — a leading manufacturer of rail equipment — for $11.1 billion. Per the agreement, the company will merge its operating segment, GE Transportation, with Wabtec. On completion of the synergistic deal, General Electric will obtain $2.9 billion in cash, whereas the company and its shareholders will own a 50.1% ownership interest in the combined company. The remaining 49.9% of stake of the combined company will be retained by Wabtec shareholders. Notably, the deal is likely to close in early 2019.

The latest move will combine GE Transportation’s digital solutions for railroad, marine, drilling, wind and mining industries with Wabtec’s extensive range electronic solutions. As a result, their market capabilities will be stronger, adding a momentum to the development and implementation of innovative solutions in key markets. This will help to improve the safety, efficiency and productivity of their offerings.

Notably, the combined company will have a large global installed base, with more than 23,000 locomotives that would create significant opportunities for aftermarket services growth.

Our Take

General Electric is well positioned for long-term growth backed by improved performances from emerging markets like India and China. In order to focus more on its core business activities, the company has exited from the financial business and increased its investments in key industrial businesses through restructuring, state-of-the-art technology, and R&D initiatives. Currently, it has three core segments — power, aviation and healthcare equipment — which require advanced hi-tech products along with a high degree of reliability. These products generate higher margins and are likely to contribute to impressive long-term growth.

In the past three months, shares of this Zacks Rank #3 (Hold) company have gained 5.3%, against the industry’s decline of 4.8%.

Moreover, a significant portion of the company’s total revenues are generated from emerging markets. For instance, General Electric has been selling big-ticket items such as locomotives and power turbines to India and China. Going ahead, it is likely to benefit from these regions, given their faster economic growth.

Further, General Electric’s strong free cash flow allows it to invest in product innovations, acquisitions and business development, which auger well on a long-term perspective.

Stocks to Consider

Some better-ranked stocks from the same space are Federal Signal Corporation FSS and Danaher Corporation DHR. Both of these companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Federal Signal outpaced estimates in the preceding four quarters, with an average positive earnings surprise of 16.1%.

Danaher exceeded estimates in the trailing four quarters, with an average positive earnings surprise of 4.1%.

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