GE's Breakup One of the Catalysts We've Been Hoping For

We maintain our discounted cash flow-derived fair value estimate of $131 per share for General Electric GE following the news that the conglomerate will separate into three public companies. We think this news is an important catalyst that will help close the persistent price/value gap for the stock, second only to the company hitting its target of high-single-digit free cash flow margin by 2023, which we think is tantamount to the GE story. Nonetheless, investors should cheer the news that management has committed to this target by 2023, as opposed to "2023-plus," as it had previously communicated. Additionally, investors will now have the opportunity to own either or both exceptional franchises in aviation and healthcare without having to hold on to GE's more challenged businesses. GE's plan is a much-needed audible from the prior broad portfolio construct first contemplated by CEO Larry Culp's predecessor, John Flannery, in June 2018. Culp pulled one audible when he scrapped that plan in favor of the painful but necessary decision to sell biopharma to Danaher. The Nov. 9 announcement represents the second such audible. While this was certainly on our radar of possibilities, we thought the plan would more likely be to only spin off what remains of GE Healthcare (mostly due to continued rumors in the press, Culp's prior comments, and because such a move was most like Flannery's prior plan). However, this would have left GE shareholders with one great but currently challenged wide-moat franchise in GE Aviation with two no-moat turnaround stories in GE Renewable Energy and GE Power. We think this situation would have been less than ideal, and we would have preferred GE hold on to healthcare, had it chosen to remain a multi-industry conglomerate.

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