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Valuation Analysis Post-Split


The impending split of General Electric on April 2 has investors evaluating the valuation problem. Comparing how similar companies trade in the marketplace serves as a useful starting point.

GE Aerospace: The Jewel of the New GE

Following the split, investors will no longer have “General Electric” as a reference point. Instead, they will have GE Aerospace, a business highly regarded on Wall Street, retaining the iconic “GE” stock symbol. With expectations of premium valuation, GE Aerospace is poised for success.

Aerospace Industry Dynamics

In the U.S., aerospace and defense stocks trade at an average of approximately 18 times estimated 2024 Ebitda. Among these, Heico stands out at 26 times Ebitda, fueled by consistent annual sales growth exceeding 10%. On the other hand, Boeing and Airbus demonstrate varying profit margins due to operational challenges and market positioning.

Growth Opportunities for GE Aerospace

With market growth alone, GE Aerospace anticipates a steady 4% to 5% annual sales increase. The global fleet expansion of 3% to 4% annually further bolsters growth prospects. Leveraging innovation and pricing strategies, GE Aerospace positions itself for sustained success.

Valuation Projection

Valued at 18 times estimated Ebitda, GE Aerospace is expected to represent a significant portion (85% to 90%) of the post-split General Electric’s total value. The remaining $20 billion to $30 billion in value will be attributed to GE Vernova, encompassing gas power, wind turbine, and electricity-grid businesses.

Evaluating Vernova’s Value

When it comes to valuing Vernova, the task is more complex than determining the worth of GE Aerospace. Vernova has dedicated years to enhancing underperforming business units, setting it apart. While some companies offer similar services to Vernova, none encompass all that Vernova does. Particularly noteworthy is that the U.S.-based companies most like Vernova are limited in number.

Comparative Analysis

Japanese-based Mitsubishi Heavy Industries manufactures gas turbines alongside other products, while Schneider Electric focuses on power grid-related ventures with significantly higher margins than GE’s grid business. Siemens Energy and Vestas Wind Systems both manufacture wind turbines, providing investors with some insight, yet they do not follow similar trading patterns.

Valuation Considerations

As an alternative approach to valuing Vernova, we can examine U.S. manufacturing companies. On average, they are valued at around 12 times their estimated 2024 Ebitda. This multiple could be an achievable target for GE Vernova as it enhances margins and revitalizes its money-losing wind turbine business.

Financial Outlook

Although GE Vernova did not record a net profit in 2023, it did generate positive free cash flow of approximately $440 million. The company projects this figure to rise to roughly $900 million in 2024. Additionally, Ebitda for 2023 totaled around $800 million, a figure expected to climb to $2.2 billion to $2.4 billion in 2024.

Road to Growth

The projected Ebitda margin for 2024 stands at about 6% to 7%, indicating room for growth towards double-digit margins in the future. Details on how Vernova management plans to achieve this will be shared at an investor day in New York on Wednesday.

As for GE Aerospace management, their insights will be presented on Thursday. Reflecting on recent market trends, GE stock has surged by approximately 90% in the past year, surpassing the S&P 500 (27%) and Dow Jones Industrial Average (17%).


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