General Electric (GE)'s industrial focus remains obscured by a conglomerate haze. Jettisoning its financial arm makes the $276 billion company far easier to understand and returns attention to the company's hard-to-replicate aviation, power and health care businesses. With the pieces valued similarly to rivals, GE carries a smaller but nevertheless conspicuous discount. It may prove hard to shrink.
Losing GE Capital will free up capital for GE. The company led by Jeff Immelt plans to return more than $90 billion of it to investors. The move, announced last week, delivered an uplift of about 10 per cent to GE's market value, but attention is turning back to what's left, starting with the first-quarter results reported on Friday.
Using divisional Ebitda estimates for next year from Barclays, Breakingviews put the businesses side-by-side against peers, some of which are not perfect comparisons. The power and water business generates the most profit for GE, and should deliver $6.9 billion of Ebitda next year. Rivals Eaton and Fluor fetch a multiple of over nine times, meaning GE's should be worth about $65 billion. The $6.3 billion of Ebitda that GE's aviation business could throw off would be worth $55 billion, based on where UK-based Rolls-Royce trades.
GE's medical division, which produces MRI machines and other equipment, is expected to produce $4.2 billion of Ebitda. Using Varian Medical Systems and its valuation multiple of over 12 for comparison, the division is worth $52 billion. And although GE's large oilfield business has fallen on hard times, it should nevertheless produce $2.7 billion of Ebitda. Valued similarly to Baker Hughes, it clocks in at $27 billion. The transport division's locomotives and such may be worth $16 billion, using Caterpillar for comparison. And the stagnant lighting and energy management businesses, valued on a discount to the average S&P 500 Index company, comes in at $10 billion.
Throw in the remaining finance operations at their book value of $90 billion and GE is worth about $315 billion. With nearly 10.1 billion shares, that suggests GE stock should trade at a little over $31, or about 15 per cent higher than where it does now. Even a more focused GE will still be a grab-bag of businesses with few obvious benefits to being housed under the same roof. And the structure will come at a cost.
