General Electric's Split: A Closer Look at GE Aerospace
Investors assess the true value of GE's split, particularly the potential of its commercial jet-engine business. Analysts provide insights on GE Aerospace's advantages and estimated valuation.
General Electric (GE) is on the verge of a major transformation as it prepares to split into two separate entities. One will be focused on commercial aerospace, while the other will handle power generation. This strategic move has prompted Wall Street to assess the true value of each business.
Investors are eager to determine the potential of GE's commercial jet-engine business, and Wells Fargo analyst Matthew Akers has provided an early estimate. After conducting a thorough analysis, Akers has upgraded his GE stock-price target from $148 to $163 per share. In fact, he rates the overall presplit company as a Buy, based on his expectations for GE Aerospace to excel in the years to come.
Akers highlighted some key advantages of GE's commercial engine fleet. In terms of size, it is three times larger than that of its competitor RTX when adjusted for joint venture stakes. This gives GE a significant advantage in terms of cost distribution and the ability to recoup investments faster for new engines. Additionally, the mix of ages among GE's engines in use is more favorable compared to its peers. Nearly two-thirds of these engines are within the mid-life range of six to 20 years, which is the prime aftermarket period. This is noteworthy because manufacturers like GE can generate higher profits from aftermarket parts and services than from new engines.
Based on his analysis, Akers values GE Aerospace at approximately $150 billion, taking into account its debt. As for GE's power generation business, known as GE Vernova, it is estimated to be worth around $34 billion.
In conclusion, General Electric's split into two companies is expected to create distinct opportunities for growth. With its robust commercial engine fleet and advantageous fleet demographics, GE Aerospace appears poised for success in the future.
Vernova, a power-generation company, is being valued at a significant multiple of its expected 2024 free cash flow. Specifically, it is valued at about 37 times its projected free cash flow for that year. This valuation is much higher than the average multiple of 15 times estimated 2024 free cash flow for companies in the S&P 500.
It is important to note that Vernova currently has wind-power businesses that are not profitable, but the company anticipates turning them around in the coming years. This could potentially boost its financial performance and justify its current valuation.
In addition to its cash flow multiple, another metric used to value Vernova is its estimated 2024 sales. Comparatively, the S&P 500 trades at about 2.6 times sales. These valuation ratios will likely be discussed extensively in relation to Vernova and other companies under the General Electric (GE) umbrella.
It will be challenging for investors to navigate and understand all the different valuation metrics being used. Some of these include Ebitda multiples, sales multiples, free cash flow multiples, earnings multiples, and possibly even operating profit multiples. Each of these metrics provides a unique perspective on the company's value.
Despite the complexity of these valuations, they are affecting the sentiment around GE stock. The recent bullish call and subsequent increase in price target have had a positive impact on the stock. As of late morning trading, GE shares were up 0.7%, outperforming the S&P 500 and Nasdaq Composite, which were down 0.3% and 0.2%, respectively.
Analysts continue to have a favorable outlook on GE stock, with approximately 63% of analysts rating it as a Buy. This is higher than the average of around 55% for stocks in the S&P 500. The average analyst price target for GE stock is slightly lower than the recently increased target, hovering around $148 per share.
Over the past 12 months, GE stock has shown significant growth, with an increase of approximately 67%.