Now that General Electric (NYSE:GE) announced it is breaking up, speculators are kicking the tires to value the pieces. This sent GE stock up $1 per share on June 26, which doesn’t sound like much but represented an 8% pop in shares that open for trade June 27 at about $13.80 each.
In a press release, GE said it would focus on aviation, power and renewable energy, spinning out GE Healthcare and its 63% of Baker Hughes (NYSE:BHGE), to deliver “growth and shareholder value creation.”
The transactions will take years to complete, with the release saying Baker Hughes disposed of “in an orderly manner,” and 80% of the healthcare unit distributed to current GE shareholders.
GE Capital will also be pared down by $25 billion. Until the healthcare unit split the 12 cents per share dividend will be maintained. So, GE stock is in a transition phase to say the least.
GE Stock and the Company’s Future
Current shareholders will get GE stock representing the healthcare unit, which had $19 billion in revenue last year and grew by 5%, and a profitable jet engine unit with $15 billion in cash on the balance sheet.
CEO John Flannery called this a “turnaround strategy,” but it’s clearly a break-up of the company that was part of the Dow Jones Industrial Average from its inception in 1896 until the day of the announcement.
Flannery did his best for shareholders, but his effort to keep the company wrecked by predecessor Jeff Immelt failed, and now everyone involved is heading for the corporate lifeboats.
Calling this an “important milestone” for GE stock is like the captain of the Titanic calling the iceberg an expansion opportunity
A more accurate appraisal from Flannery came in response to a question about whether more moves can be expected.
“We are finished,” Flannery said.
Some analysts see the announcement as a buying opportunity. The anticipated price to earnings ratio is now a reasonable 12.8, and the price to book value is about 2.
While some analysts are calling Immelt’s legacy “tarnished” by the breakup, it’s more accurate to call it destroyed.
Attention will now move to the value of GE Healthcare, which Flannery ran before becoming CEO of the parent company.
That company has 54,000 employees, out of 310,000 in the whole company, with profitable medical imaging and monitoring businesses, and promising work in biomanufacturing.
Its value is estimated at $65 billion, over half the parent company’s current market cap.
Baker Hughes GE, meanwhile, had a market cap of about $37.5 billion on revenue of $22 billion, and GE’s 63% stake should net it about $25 billion.
A November “sum of the parts” analysis of the company by Bloomberg estimated it could be worth over $200 billion.
That value will take time to realize and the sales are taking place against the backdrop of economic turmoil, so don’t cash the check yet.
The Bottom Line on GE Stock
Flannery, who previously ran GE Healthcare, was a realistic executive who eventually saw he was dealt a bad business hand and threw it in.
He didn’t romanticize the assignment, and he is getting as much as he possibly can from the mess he inherited.
GE, however, is not coming back. The name may float for a while on some of the pieces, especially the aviation unit, but its history as a great American company ended with Jeff Immelt, and what’s going on now is a corporate auction.
If you like running garage sales, buy it.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.