After years of watching its stock underperform the broader market, industrial giant General Electric (NYSE:GE) has announced it is splitting up into three separate publicly traded companies focused on aviation, healthcare and energy. News of the reorganization was greeted positively, with GE stock initially jumping as much as 17% in pre-market trading before closing the day up 2.7%.
GE stock is 26% higher year to date, one of its better annual performances over the past decade, leading some on Wall Street to say that now is the optimal time to buy shares of the Boston-based company. However, the wiser course of action is to wait until the breakup is completed, which may be a while.
GE plans to spin off its healthcare unit in early 2023, followed by a spinoff of its energy unit in early 2024. The healthcare and energy companies will operate under different names once this happens. The name “General Electric” will live on with the company’s aviation division, which will be the third publicly traded company once the organizational change is finalized.
A New Start… Again
General Electric has been a going concern since it was co-founded by Thomas Edison in 1892. Over more than 100 years of continuous operation, the industrial conglomerate has undergone several transformations and incarnations, often changing along with the U.S. economy.
At various times, GE has been the market leader in products ranging from jet engines and wind turbines to household appliances and light bulbs. The company’s heyday was arguably in the 1980s under the leadership of late chief executive Jack Welch, who moved GE into financial services and bought the NBC television network, delivering outsized returns to investors in the ensuing decade.
At the turn of the 21st century, GE was, for a time, the world’s biggest company by market capitalization. However, General Electric and its stock have struggled since the 2008-09 financial crisis. Already grappling with a troubled financial division, GE was wrecked by the financial crisis and has never fully recovered.
In 2018, GE stock was removed from the Dow Jones Industrial Average after being one of the original members of the blue-chip average since 1896. The company’s share price has struggled mightily, down roughly 55% over the past five years, even after this year’s advance. On average, GE stock has gained just 0.5% annually since 2009, compared to a 13% annual gain for the S&P 500 index during the same time period.
This past summer, in an effort to improve appearances, GE executed a 1-for-8 reverse stock split. The split-adjusted shares began trading on Aug. 2 above $100. However, the reverse stock split was largely a cosmetic move designed to make the shares appear more valuable. The reverse stock split did not mask the poor performance of the share price over the past decade.
GE Plagued by Debt Issues, Falling Revenue
Beyond its poor stock performance, GE continues to be hindered by high levels of debt, which management has been working to reduce. Most recently, GE sold its aviation financing unit for more than $30 billion, which the company said it will use to pay down debt.
Since the end of 2018, GE has cut its debt by about $75 billion. It’s expected to end this year with less than $65 billion in debt. This week, GE said it will generate more than $7 billion in free cash flow in 2023 and plans to cut its net debt to less than $35 billion by then.
While the debt repayment is to be lauded, GE also needs to focus on revenue generation, which has steadily eroded since the financial crisis.
The company’s revenue came in at $79.62 billion last year, less than half the $180 billion in revenue achieved in 2008, just prior to the subprime mortgage meltdown. This year, analysts predict revenue will fall more than 5% before increasing 6% next year.
The Bottom Line on GE Stock
In 2015, activist investor Nelson Peltz took a stake in GE and pushed for the company to return to its industrial roots and offload unprofitable divisions such as its finance arm. Peltz applauded the plan to break GE into three companies.
While the breakup of GE makes sense on paper, executing such a reorganization is likely to be difficult for such a large company. Finalizing the split into three separately traded companies is likely to take years. In the meantime, it creates further uncertainty for GE stock.
Add in the still considerable debt load on GE’s balance sheet and its declining revenues, and investing in General Electric at this point in time is difficult to justify. Better to wait and see how the breakup goes before taking a position. Right now, GE stock is not a buy.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.