GE is divided into three. What are the coins worth?

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Comparable company valuations based on sales provide a perspective on the value of GE’s three businesses.

Patrick Hertzog / AFP via Getty Images


GE

The epic transformation of continued on Tuesday as management announced the conglomerate would go their separate ways.

Fortunately, there are enough similar companies and enough data on the performance of their stocks to get investors started.


General Electric

(ticker: GE) plans to split its healthcare unit by 2023. A year later, the electricity and energy business will cease to exist. This will leave the GE legacy of its aerospace business serving the commercial aerospace and defense industries.

While the S&P 500 was flat and the Dow Jones Industrial Average was down around 0.3% early in the session, GE stock was up around 5% to $ 113.73 per share.

The move adds about $ 7 billion to the value of GE, which has a market capitalization of about $ 126 billion; approximately $ 16 billion in debt, net of cash, related to its industrial operations; and a lending arm that lists approximately $ 116 billion in assets and $ 14 billion in equity.

There is also a pension that is underfunded by about $ 21 billion. Accounting for pensions is difficult. That could amount to around $ 15 billion in debt, if GE chooses to borrow money and add enough liquidity to the plan that it won’t be a problem in the future.

Is the $ 7 billion hike, with inventory just under $ 114, the right amount? RBC analyst Deane Dray sees more benefit, writing in a report on Tuesday that the value of all of GE’s coins is around $ 130 per share.

It is a starting point. The easiest way for investors to kick the tires on that number and see GE’s value for themselves is to focus on sales by division.

Valuations of comparable companies in terms of turnover give a clear signal of what all three parts of GE are worth, given that in the long run the profitability of similar companies is expected to move closer. In general, the nature of business competition means that profit margins are expected to converge over time.

GE’s aerospace business is more directly comparable to that of aircraft engine manufacturer Safran (SAF.France) and Raytheon Technologies (RTX) and, perhaps, MTU Aero Engines (MTX.Germany). These three stocks trade on average at about three times the sales.

This implies that GE Aviation is worth $ 63 billion, given that it has generated around $ 21 billion in sales in the last 12 months.

Comparisons for GE’s power and power businesses are a bit more difficult, but a mix of


Siemens Gamesa Renewable Energy

(SGRE.Germany),


Siemens

(SIE.Germany), and


Mitsubishi Heavy Industries

(7011.Japan) involves a multiple of about once sales. GE Power had about $ 33 billion in year-over-year revenue, so it should be worth about that.

A look at Siemens Healthineers (SHL.Germany) and Philips (PHIA.Netherlands), which are comparable to GE’s healthcare division, indicates the deal could trade at three times sales. Sales have been around $ 18 billion in the past 12 months, so GE Healthcare could be worth $ 54 billion.

Those three numbers add up to $ 150 billion, although some value is likely to be lost due to overheads and the overhead costs of the business are duplicated. On the bright side, GE Capital, the struggling loan company, is likely to be worth someone a modest something. Offsetting all of that with debt and the pension obligation, GE is worth maybe $ 130 billion, or roughly $ 130 per share.

GE has about just under 1.1 billion shares outstanding.

This is a very rough calculation, but the result is similar to Dray’s. This is important because the estimates of the sum of the parts are no longer theoretical for GE: the break is happening.

The GE stock has actually done well recently. It has averaged 20% per year over the past three years, compared to 21% for the


S&P 500.

Both are hit numbers, given that the average for the entire market over the past two decades is around 10%.

To see if the good times continue, investors might


Siemens
,

given that the German conglomerate has undergone a similar transformation. The Siemens heritage,


Siemens Healthineers
,

Siemens Gamesa and


Siemens Energy

(ENR Germany) all trade separately now.

Siemens stock has returned around 20% per year for the past three years as it underwent its transformation. Siemens Gamesa and Healthineers shares have returned around 19% and 18%, respectively, over the past three years. And Energy, created at the end of 2020, has gained around 16% over the past year.

All of this is a sign that GE shares will not be dead money as the transformation continues.

It’s a lot to digest. But GE is a very complicated business.

Write to Al Root at [email protected]

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