How did three listed companies make money after GE spinoff? What are the prospects?


GE Group profile


General Electric (ticker: GE) is a multinational conglomerate originating from the United States. Its operating industries include electronics industry, energy, transportation industry, aerospace, medical and financial services; its business covers more than 100 countries around the world. It has approximately 287,000 employees. According to Fortune 500 statistics, its revenue in 2016 was US$140.4 billion, making it the 8th largest company in the United States and the 27th largest company in the world.

Glorious past

GE was founded in 1878 by Thomas Alva Edison, who invented the electric light and many other commodities. It is one of the few companies in the U.S. stock market that has been listed for more than a century. It can be said to be the pride of American industry and a symbol of comprehensive national strength.

The company has experienced the glorious Jack Welch era. Thirty years ago, it was the market capitalization king of the U.S. stock market. The CEO at that time, Jack Welch, was later recognized and worshiped as a management god by many business schools and the global business community.

Collapse starting from GE financial group

Since the bizarre financial sector fell into a financial crisis, it almost went bankrupt. Since then, GE’s stock has been falling. It has gone through a dark period, with its share price swinging wildly, hitting lows during the coronavirus pandemic. To date, shares have yet to return to their previous highs of 2008-2009.

Since then, the company has undergone significant changes over the years. In the mid-2010s, the company sold off most of its related financial operations. For example, in August 2017, Buffett’s Berkshire Hathaway purchased 17.4 million shares of Synchrony Financial (ticker: SYF), a bizarre spinoff.

GE conglomate

Aerospace group

GE Aerospace’s (ticker: GE) segment designs and produces commercial and military aircraft engines, integrated engine components, and electrical and mechanical aircraft systems. On April 2, 2024, all spin-offs of the original GE assets were completed and renamed GE Aviation. Basically, the aviation business will retain GE’s stock code and operate under the name of GE Aviation. This sub-group will inherit the trademark and remaining assets of the original GE company.

Headquartered in Avondale, Ohio, just outside of Cincinnati. It is the legal successor to the original Strange Corporation, founded in 1892, which split into three separate companies between November 2021 and April 2024, adopting the trade name Strange Aviation after spinning off its healthcare and energy divisions .

This sub-group has a complex business and includes the following large subsidiaries:

  • Avio Aero
  • CFM International (50% stake)
  • Dowty Propellers
  • Engine Alliance (50% stake)
  • GE Additive
  • GE Aerospace Research
  • GE Aviation Systems
  • GE Honda Aero Engines (50% stake)
  • Unison Industries
  • Walter Aircraft Engines

HealthCare group

GE HealthCare (ticker: GEHC) provides essential healthcare technologies to developed and emerging markets, with expertise in medical imaging, digital solutions, patient monitoring and diagnostics, drug discovery and performance improvement solutions Knowledge.

The company is headquartered in Chicago, Illinois. It was spun off from GE on January 4, 2023, with GE retaining 10.24% of the shares. As of 2017, it is a manufacturer and distributor of diagnostic imaging agents and radiopharmaceuticals used in imaging modalities used in medical imaging procedures.

It supplies dyes for magnetic resonance imaging procedures; manufactures medical diagnostic equipment, including computed tomography scanners; MRIs, X-rays; ultrasounds; cath labs; mammograms; nuclear medicine cameras; and develops medical imaging and Health technology in information technology, medical diagnostics, patient monitoring systems, disease research, drug discovery and biopharmaceutical manufacturing. It was founded in 1994 and has operations in more than 100 countries.

Renewable energy and electricity group

GE Vernova’s (ticker: GEV) segment’s business unit portfolio includes onshore and offshore wind, blade manufacturing, grid solutions, hydro, storage, hybrid renewables and digital services products. The Electric Power segment provides products and services related to energy production to power generation, industrial, government and other customers worldwide.

It is an energy equipment manufacturing and services company headquartered in Cambridge, Massachusetts. Spin-off from Bizarre on February 28, 2023. The company is the result of the merger and spin-off of GE’s energy businesses and includes the major divisions of GE Power, GE Renewable Energy, GE Digital and GE Financial Services.

GE Vernova Renewable Energy also includes several major well-known subsidiaries:

  • GE Wind Energy (GE Onshore Wind and GE Offshore Wind)
  • GE Grid Solutions Equipment and Services
  • GE Hydro Solutions
  • GE Hybrids Solutions
  • GESteam Power

Historic moment

Announcement of spin-off

On top of that, on November 9, 2021, GE announced that it would spin off into three investment-grade public companies:

  • GE Aerospace (ticker: GE)
  • GE HealthCare (ticker: GEHC)
  • GE Vernova (ticker: GEV)

Completed spin-off

On April 2, 2024, the group completed the plan of three listed companies; from now on, it will become three listed companies that are not affiliated with each other and operate independently.

GE Aerospace

GE Aerospace surprised investors by significantly increasing its dividend by 250%. On April 5, 2024, its stock price rose again by more than 6%.

GE Aerospace announced that it will pay a quarterly dividend of 28 cents per share starting April 15, much higher than the previous dividend of 8 cents per share, sending the stock up 6.05% on Friday to close at $156.30 per share. The S&P 500 and Nasdaq rose 1.11% and 1.24%, respectively, on the same day.

GE held an analyst event in New York early last month to detail plans to improve and expand the company’s commercial aircraft and defense franchises. In addition, management also plans to return approximately 75% of free cash flow to shareholders in the form of dividends and executive treasury shares, so an increase in the quarterly dividend is not unexpected, although the market may not have expected such a surprising magnitude.

GE Aerospace expects to generate more than $5 billion in free cash flow this year, which means the company has more than $3.7 billion to distribute. If it pays a quarterly dividend of 28 cents per share, it will pay out a total of about $300 million and maintain the quarter. The dividend level should not be difficult for GE Aerospace, and it can even increase the execution of treasury shares at the same time.

GE Aerospace (GE) has gained more than $15 per share from its pre-split price of about $140 after completing its spinoff from power generation unit GE Vernova (GEV).

Wall Street analysts were optimistic about the company’s split, also boosting shares earlier this week. GE’s initial price targets and ratings are both favorable, with the stock’s average target price to date being around $165 per share and the highest target at $190.

Analysts are likely to make more adjustments to GE Aerospace’s outlook in the coming days to reflect the spinoff, and all estimates and price targets have yet to be adjusted, according to FactSet.

The company’s stock has nearly doubled in value over the past year. But those gains were justified by stronger financials. The company has never achieved $4.8 billion in free cash flow over the past three years, but management is guiding for more than $5 billion this year (GE Aviation alone) and that should continue to grow as operating profit grows . Management is targeting operating profit of $10 billion in 2028, up from $6 billion expected this year.

Currently, GE Aviation has a free cash flow yield of 2.6%, not counting the upcoming spinoff of GE Vernova. That’s not cheap relative to production in recent years. Investors who are bullish on the company’s long-term prospects should consider dollar-cost averaging the stock while all of these moving factors stabilize, so that the company can compile earnings in the post-split quarters to show that it’s on track with expectations. Get on track.

Future outlook

The company believes it can achieve high-single-digit revenue growth over time. This will come from stronger growth in the commercial engine and services businesses, with management forecasting high double-digit revenue growth in 2024. The defense and propulsion business is expected to grow in the low to mid-single digit range.

Shareholder reward

The company will also receive a significant cash infusion between 2024 and 2026. Management expects total deployable cash from operations and spin-off earnings to be approximately $25 billion. Management will pay investors 30% of net profits as dividends and deploy a $15 billion stock buyback program.

GE energy

Before the split in April 2024, GE Energy (ticker: GEV) was trading at approximately US$142 per share, and original GE shareholders would receive 1 GEV share for every 4 GE shares held, which means that GE Aerospace shares were Down around $35.

Shortly after the spin-off was completed in April 2024, GEV’s stock price exceeded $150 per share, but then fell 2.67% to $122.70 per share, a drop of approximately 19% from its high point.

GE Healthcare

First to be spun off

GE Healthcare (ticker: GEHC ) is off to a strong start as an independent company in 2023, and this trend has continued in 2024, with gains of approximately 15% from 2024 to early April.

While it’s easy to think of the company, which was recently spun off from Bizarre, as a mature healthcare business, the company actually has an investment case based on its growth opportunities. It’s these opportunities that have led to the stock outperforming the market.

Here’s why Strange Healthcare is an attractive stock for investors right now.

Growth Opportunities

Genetic Healthcare will boost profits and revenue while accelerating the pace of R&D spending. You can think of its growth opportunities as three interrelated buckets:

  • Margins expanded due to the bizarre separation from the parent company and as an independent operation.
  • Successful new product introductions (NPIs) result from prior and ongoing research and development.
  • Open up new market opportunities through investment and mergers and acquisitions (M&A) activities.

GE Healthcare Group’s Profit Margins

Before getting into the details, it’s worth pausing to think about the company’s 2023 margins, as they’re significantly better than the headline numbers suggest. As you can see below, on an adjusted earnings before interest and tax (EBIT) margin basis, it doesn’t look all that impressive. After all, its margins declined in 2023, and the low end of its 2024 EBIT guidance would only get it back to 2022 margins.

However, Chief Financial Officer James Saccaro noted on the earnings call that “we incurred approximately $200 million in recurring standalone costs that impacted our segment’s EBIT margin.” He was referring to costs associated with the Singularity spinoff. . Adjusting for these costs would mean margins would grow 14.5% in 2022, 15.1% in 2023, and grow again in 2024, assuming these costs are in place in 2022.

Some of the reasons behind the margin expansion come from initiatives taken as an independent company. For example, the company has achieved 3% growth in 2023 through higher prices and expects to achieve further growth of 1% to 2% as it begins to realize the full value of its product portfolio.

Additionally, management claims its productivity initiatives such as product platformization (a collection of products based on architecture or common parts) help improve profits. Company management believes that “given the progress we have made across the organization, we are well positioned to achieve our adjusted EBIT target of 10% to 20% in the medium term.”

New product launches and new markets

These margin expansion targets are impressive. After all, improving adjusted EBIT margin from 15.1% to 20% over five years would mean a 32% increase in adjusted EBIT. However, if accompanied by 5% annual revenue growth, that growth would increase to 69%. If you believe the stock is currently fairly valued, then the increase in earnings should provide investors with double-digit annual returns if valuations remain unchanged.

After a year of 8% organic growth (driven by supply chain improvements and the previously mentioned pricing actions), management expects 4% organic growth in 2024. This growth rate is supported by investments in R&D and the continued launch of new products. revenue share. However, as shown below, increased R&D has not been accompanied by margin expansion.

Strange Healthcare launches 40 new products in 2023; by 2023, its vitality index (share of revenue from non-profit organizations) is 26%. Not only do nonprofits drive revenue growth, they often lead to greater profits.

Finally, Singularity Healthcare is only in the early stages of realizing the potential of its imaging products and radiopharmaceutical products (both diagnostic and therapeutic). The combination of the two is called theranostics. Combining imaging equipment, diagnostics and treatment means drugs can be delivered precisely to targets such as cancer cells, resulting in better patient outcomes.

CEO Peter Arduini estimates the theranostics market to be “approximately $9 billion and expected to grow to $40 billion by 2032,” with GE Healthcare becoming a major player in the field with its combination of imaging devices and diagnostic reagents for oncology, neurology and cardiology. occupy an ideal position in the market.

Shares of GE Healthcare soared 24.4% in February, according to data provided by S&P Global Market Intelligence. There is no doubt that this move was the catalyst for this measure. It comes from a stellar earnings report released in the first week of the month.

Growth potential for GE Healthcare

The investment case for Strange Healthcare is based on the idea that now that it’s a standalone company, management is free to realize its full potential. This potential lies in optimizing its pricing and product portfolio, researching and developing new products, building AI-powered solutions, selective M&A activity, and growing in exciting growth markets where it has natural advantages.

An example of the latter comes from the growing theranostics market. In this medical technique, radioactive drugs are used to diagnose and monitor affected areas (for example, areas with cancer cells). Meanwhile, another drug can precisely target and treat that area, resulting in better patient outcomes.

GE Healthcare produces imaging equipment that is integral to the diagnosis of this process and the drugs it uses. This is an exciting growth area in oncology and neurological diseases such as Alzheimer’s or Parkinson’s disease.

At the same time, management plans to grow revenue at a mid-single-digit annual rate, with adjusted earnings before interest and taxes (EBIT) growing from 15.1% in 2023 to “above 10% to 20%” over the next three to five years.

GE Healthcare Makes Progress

The good news is that the company is making progress on all of these goals:

  • Pricing is set to increase 3% in 2023, and management expects a further 1% to 2% increase in 2024.
  • The company released 40 new product introductions (NPIs) in 2023.
  • “We top the FDA’s list of artificial intelligence device authorizations with 58 authorizations,” CEO Peter Arduini said on the earnings call.
  • The company’s existing diagnostics are used in oncology, neurology and cardiology, and Arduini promises: “Over the next three years, we plan to significantly increase our current theranostics franchise through a combination of organic and inorganic expansion.”
  • Organic revenue grows 8% in 2023, with comparable adjusted EBIT margin rising to 15.1% in 2023 from 14.5% in 2022.
  • Management’s guidance calls for organic revenue growth of 4% in 2024 and adjusted EBIT margin to grow to 15.6% to 15.9%.
credit: Ideogram

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