General Electric Company (GE:NYE) recently completed the spin-off of its healthcare business as part of its 2021 announced plan to form three public companies focused on aviation, healthcare, and energy. The restructuring plan is being implemented under the leadership of Larry Culp, with the objective of making GE a leaner business focused on aviation.
GE shareholders received one share of GE HealthCare Technologies (GEHC:NSD) for every three shares of General Electric stock held, and the company retained a 19.9% stake in GEHC, approximately. The completion of the healthcare spin-off is expected to alleviate some of the short-term pressures for shareholders, however, the energy business spin-off is looming and may cause some pains for the stock in the near future.
Nevertheless, we remain optimistic about GE’s long-term prospects. The company’s strategic divestment plan is the right move for the business and will allow it to focus on its core aviation business. As the restructuring plan continues to move forward, General Electric stock is likely to head higher in the future.
How the Diversified Business Portfolio Will Benefit Shareholders?
The conglomerate discount is an important consideration when assessing the intrinsic value of a diversified conglomerate. This is because some business segments may underperform and drag the business down, resulting in management inefficiencies due to the massive size and scale of the organization.
General Electric’s aviation business is its crown jewel, and with the healthcare and energy businesses already spun off or scheduled for a spin–off, the aviation business is set to become the focus of investors in 2024.
Furthermore, the travel industry is close to full recovery from pandemic–related woes, which is encouraging news for GE Aviation, as airlines will likely invest in new technologies as business conditions normalize.
Thanks to the three spin–offs, individual businesses will have more autonomy and freedom to focus on what matters, resulting in notable efficiencies in the long run.
GE Shareholder Optimism May Wane in the Near Term
Under the new GE Vernova, the energy portfolio – including renewables, power, and energy financial services – will be combined into a single business segment.
This will further advance the company’s mission of helping to create a cleaner, more resilient energy future. As GE Vernova moves closer to completion, the company is expected to continue to face challenges due to the uncertain nature of the natural gas business.
Nevertheless, the spinoff will provide investors with greater clarity on the energy business’s future.
Should You Buy GE Stock?
Wall Street analysts have responded positively to the spin–off of General Electric’s healthcare business, with Barclays analyst Julian Mitchell raising his GE stock price target from $92 to $96 on January 6.
This follows RBC Capital analyst Deane Dray’s December decision to increase the GE stock price target from $93 to $98, citing the value created by asset sales. Currently, the average GE stock price target of 14 Wall Street analysts is $87.48, indicating an upside potential of 9.4%.
The Takeaway:
On January 4, GE stock price saw a decrease as expected following the spin–off of its healthcare business.
To gain a clearer understanding of the stock price performance, investors should use adjusted share prices in place of unadjusted historical prices, as each investor received a proportionate number of GE HealthCare Technologies shares to their individual stake in General Electric.
The company is on track with its planned asset sales, and the forthcoming spin–off of its energy business may cause short–term volatility in GE stock prior to the realization of any potential benefits.
