Larry Culp finally pulled the plug on General Electric (NYSE:GE) stock, killing the 129-year old conglomerate that created the industrial age.
Ironically, the electrical unit, founded to end the “war of the currents” between Thomas Edison’s DC power and Nikola Tesla’s AC, won’t take the GE name. With the jet engine unit spin-off energy and healthcare as tax free transactions in 2023 and 2024, Culp, who was hired to save GE in 2018, chose to pull the plug after cutting debt by $75 billion.
He also dealt with the company’s pension and long-term care insurance obligations. While he made his name running Danaher (NYSE:DHR), a health care company, he’s technically going with the engine unit after supervising the break-up.
What’s GE Stock Worth?
The question for shareholders is what the pieces will be worth. GE stock’s market cap entering Nov. 10 was $122 billion. The announcement sent the shares up $6, but they then lost half the gain during Nov. 9 trade. Analysts estimate the cost of the break-up at $2 billion. GE believes total debt will be below $65 billion by the end of the year.
Hints of the resulting valuations can be found in the company’s third-quarter report, which broke out the company’s results into segments.
Healthcare reported earnings of $704 million on revenue of $4.4 billion. Its margins through 2021 averaged 16.8%. It’s about three-fifths the size of Danaher, which had revenue of $7.23 billion for its most recent quarter and net income of $1.17 billion, $1.54 per share. Danaher is worth $213 billion, so healthcare unlocks more than GE’s own value. It could be worth as much as $150 billion.
Aviation earned $846 million on revenue of $5.4 billion during the quarter. Through the first nine months of 2021 it has been averaging margins of 10.9%. The aviation unit is comparable to Rolls Royce (OTCMKTS:RYCEY), which had about $7 billion in sales for the first half of 2021. Rolls has a market cap of $16.77 billion, so figure aviation is worth about $24 billion.
The renewable energy and power units, which will be combined, had $8.2 billion in revenue during the quarter and combined for a profit of $53 million. Renewable energy lost money, power made some. The unit might be worth $10 billion. It’s an interesting speculation.
Who Leads?
The question then becomes who leads the new units? The key man becomes Peter Arduini, hired to run GE Healthcare in June. Arduini had been running Integra LifeSciences (NASDAQ:IART), a $6 billion company focused on plastic surgery and neurosurgery. Before that, however, he was with what’s now Baxter International (NYSE:BAX), which has a $40 billion market cap.
Culp is officially staying with GE Aviation, which will retain the GE name. But expect that unit to be run by John Slattery, formerly with Brazil’s Embraer, a maker of small commercial jets. Scott Strazik, a GE lifer, runs GE Power.
The Bottom Line
All three units could be sold or combined with larger companies after the break-up. Of the three Healthcare appears the most valuable, and viable, with a niche in medical imaging and biochemistry.
My back-of-the-envelope estimates indicate healthcare could be a real prize, worth more than the rest of the company combined. More needs to be learned about each of the three units before a final valuation can be placed on them, however. You’d also want to know where the debt and the assets will land.
My guess is also that Culp will retire after the break-up, possibly returning to Harvard Business School, from which GE recruited him. He did his best, but in the end, he had to operate if shareholders were to get any return.
On the date of publication, Dana Blankenhorn held no positions in stocks mentioned in this story. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. Just in time for the holidays he has a collection of COVID-19 stories at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.
