GE Splits: "GEEZ" Day arrives 02 Apr 2024.
A conglomerate history.
$General Electric Co(GE)$ is an American MNC founded in 1892.
In its 2011 heydays, GE ranked among the Fortune 20 as the 14th most profitable company.
However, it severely underperformed the market (by about -75%) as profitability collapsed subsequently.
On 9 Nov 2021, GE announced it would divide itself into 3 public companies.
On 18 Jul 2022, the brand names of the 3 new entities were unveiled:
$GE HEALTHCARE TECHNOLOGIES INC(GEHC)$ in January 2023. Click here! to read about it.
GE Vernova (Ticker GEV). It will house the gas power and renewable energy businesses.
GE Aerospace - Ticker GE (status quo).
One year on, the time has come for the remaining two companies to be officially separated into its standalone entities.
On 29 Feb 2024, GE’s Board of Directors approved the final separation. It will take place on 02 Apr 2024, before market opens.
New companies, New valuations.
With the separation counting down, the next question arose - What will GE Vernova and GE Aerospace, worth individually? (see below)
Valuation Inference.
A starting point in to hopefully “solve” the valuation question, is to look at how similar companies trade in the marketplace.
As of 01 Mar 2024, GE trades for about 14.5x estimated 2024 EBITDA, that is similar to S&P 500’s non-financial and manufacturing companies. (see above)
This is similar to non-financial and manufacturing companies in the S&P 500 but that data point is only worth so much and go so far.
Afterall, there will be no “General Electric” for investors to refer to in a few weeks’ time.
So how?
Logically, the next approach would be to refer to the soon-to-be entity’s peers’ valuation in their respective industry / sector. (see below)
GE Aerospace is considered to be an excellent business by most on Wall Street.
That means it should get a premium valuation.
Aerospace and defense stocks (in US), trade for an average of about 18x estimated 2024 EBITDA. (see above)
Unfortunately, it is a wide range, that depends on (a) growth and (b) margins.
Examples:
Heico trades for 26x EBITDA with sales growth of > 10% yearly average, for the past few years. This was achieved partly by an acquisition strategy.
Boeing trades for almost 26x EBTIDA, while Airbus sells for 11x. Although similar companies, Boeing’s profit margins have been depressed by problems with its 737 MAX jet and defense business. Hence the EBITDA disparity.
GE Aerospace should be able to grow sales by 4% to 5% a year on average by market growth alone.
Number of planes in global fleets grows about 3% to 4% a year. GE gets some benefits for innovation as well as pricing.
At 18x estimated EBITDA, GE Aerospace would account for roughly 85% to 90% of the value of the “original” General Electric company.
That leaves about $20 Billion to $30 Billion in value for GE Vernova, where its 3 main business lines include (1) GE gas power, (2) Wind turbine, and (3) Electricity-grid business.
Now the headache.
Valuing GE Vernova, on the other hand is trickier.
Reasons:
For starters, Vernova is still working to improve underperforming business units for years.
There exists no single company that does, all that GE Vernova is doing (eg. in the 3 work fields).
Hence it will not be a 1-for-1 comparison.
For companies that come close. few are US-based. (see below)
Examples:
Japanese-based Mitsubishi Heavy Industries makes gas turbines but does other things as well.
Schneider Electric has power grid-related businesses, but it earns much higher margins than GE’s grid business.
Siemens Energy and Vestas Wind Systems both make wind turbines, they offer some help to investors, but they do not trade similarly to one another.
Alternate valuation.
Another way to value Vernova, is to look at US manufacturing companies. (see above)
They trade for an average of about 12x estimated 2024 EBITDA.
This could be a target P/E ratio for GE Vernova to aim for as it works to improve its profit margins and turn around its wind turbine business, which is currently losing money.
FY 2023 earnings.
GE Vernova did not make a bottom-line profit in 2023.
It did generate positive free cash flow of about $440 Million.
The company “expects” to improve to about $900 Million in FY 2024.
2023 EBITDA amounted to about $800 Million.
That “should” improve to about $2.2 Billion to $2.4 Billion in 2024.
Forecast EBITDA implies a 2024 EBITDA margin of about 6% to 7%.
Eventually, Vernova will have to get to double-digit Ebitda margins if it hopes to get that higher multiple.
Investors will be very interest to learn how GE Vernova management plans to achieve that at an investor day in New York on Wed, 06 Apr 2024.
Similarly, investors will hear from GE Aerospace management on Thu, 07 Apr 2024 as well.
Looking at GE stock price on 01 Mar 2024, it gained +82.23% over the past 12 months.
The S&P 500 was up +26.89% for the same period, while the Dow was up +16.92% respectively.
Is still hope and value left in this Grand Dame of 132 years old ?
My viewpoints: (mine and mine only)
I think one of the most important lesson for investors is that a company’s success (at a certain point in time) is no guarantee of its continued success, heading into the future.
This is why Mr Warren Buffett’s approach of “buying” into a company is a “right” approach, if we are in for the long haul.
Speculating and punting is another strategy (don’t get me wrong), just a case of whether it is your cup of tea because it involves quick entry and exit to ensure one does not get caught up in the short.
Looking at GE Healthcare past 12 months performance, it has gain +20.92% to close at $92.72 per share. (see above)
At its lowest, it was $63.17 per share on 30 Oct 2023. This was even lower than $67.85 per share at the end of first trading day on 04 Jan 2023 when it officially became separated from GE as a solo entity.
It has “proven” a point that I have made in my 04 Mar 2024 post that Healthcare stocks is worthy of considerations. Click here ! to read & repost ok. Thanks.
GE Aerospace is another possibility but will have to do more homework
GE Vernova, I feel is a long term investment, provided the new spin-off can prove that it is a viable business.
Good news is that long term purchase requires long term monitoring to ensure one gets it right. No hurry.
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Do you think you will be interested in GE Aerospace or the proven GE Healthcare?
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