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Three things you need to know if you buy GE today


So far, most General Electric (NYSE: GE) Investors may know that the company is about to split into two parts. GE Vernova will begin trading on April 1, while the remaining business (called GE Aerospace) will retain the GE ticker symbol. Before this event occurs, it’s a good idea to browse some projects that may be helpful to investors.

Details behind the spin-off

The record date for the spin-off is March 19, and GE stock holders will receive one share of GE Vernova for every four GE shares they hold. For example, if you hold 100 shares of GE stock, you will receive 25 shares of GE Vernova. Naturally, the 100 shares of GE stock you still own (now GE Aerospace) will depreciate on April 2 to reflect that the business that became GE Verona is no longer part of the parent company.

However, that’s not all there is to the spin-off, as investors will have until April 2 to get a rough estimate of the market’s valuation of each business. This is because from March 27 to April 1, GE and GE Vernova will have different trading markets.

  • “Post-Issuance” trading of GE Vernova will take place between March 27 and April 1 under the trading code “GEV WI”.

  • GE Vernova will begin regular trading on April 2 under the stock code “GEV”.

  • GE will trade in the “regular way” under the ticker symbol “GE,” and holders of these shares will be entitled to receive GE Vernova shares by April 1.

  • GE shares will trade under GE Aerospace under the symbol “GE WI” from March 27 to April 1, but the shares do not include the right to receive GE Vernova shares.

While all of this may sound complicated, the key point is that by monitoring the market valuation of GEV WI as of March 27, investors will be able to understand how the market values ​​GE Vernova. Likewise, monitoring GE WI will tell you how the market is valuing itself favorably against GE Aerospace, so retail investors can prepare for the “regular way” listing on April 2.

Sea wind.

Image source: Getty Images.

GE Vernova is a more exciting stock

Ge Vernova will own GE’s Power (primarily gas turbine equipment and services business), Renewable Energy (onshore and offshore wind) and Electrification (electrification systems and software) divisions.

I covered this business in more detail in my previous post outlining the case Valuation: $27.3 billion Provides estimates for GE Vernova spin-off General Electric Aerospace It was the same before.

My GE Vernova estimate may be conservative because it has a lot of growth potential. The table below shows advance earnings before interest, taxes, depreciation and amortization (EBITDA) for each segment. I conservatively interpolated management’s guidance to estimate 2024 Power and Electrification EBITDA.

GE Vernova Division

Advance profit from interest, tax, depreciation and amortization in 2022

Advance profit from interest, tax, depreciation and amortization in 2023

2024 EBITDA (estimated)

strength

US$1.7 billion

US$1.7 billion

Approximately US$2 billion*

wind

($1.7 billion)

($1 billion)

close to profitability

Electrification

($200 million)

US$200 million

Approximately US$350 million**

Source: GE briefing and author’s analysis. *Management forecasts mid-single-digit revenue growth and 100 basis points margin expansion. **Management forecasts low-double-digit percentage revenue growth and mid-single-digit margins.

The key point is that the power and electrification sector is now a reliable generator of revenue and cash flow, driven by continued demand for gas turbine equipment services and connecting renewable energy to the grid (electrification).

Key to the investment case, however, is the company’s efforts to improve profitability in the wind sector, particularly by reducing the backlog of less profitable offshore wind contracts. At the beginning of 2023, the backlog of contracts was $6 billion, which has now dropped to $4 billion at the end.

An investor is researching. An investor is researching.

Image source: Getty Images.

In recent years, the offshore wind power industry has been plagued by wind power companies, including Siemens Energy and Vestas, has been battling soaring raw material costs and supply chain difficulties. At the same time, they have been signing far fewer contracts during inflationary times.

As a result, GE management is focused on clearing its backlog while improving margins through rigorous selection of new contracts. The strategy is working in its onshore wind business, which turned profitable in the third quarter of 2023.

Valuation of GE Vernova

GE Vernova’s management believes its free cash flow (FCF) will grow. These figures result from the substantial growth in earnings noted above. For reference, a mature industrial company with revenue growth in the low single-digit percentages is generally considered to be fairly reasonably valued at around 20 times FCF.

GE Villenova

2022

2023

2024 (estimated)

2025 (estimated)

free cash flow

($600 million)

US$100 million

US$700 million to US$1.1 billion

US$1.2 billion to US$1.8 billion

Source: GE Vernova presentation.

Still, with offshore wind profitability increasing significantly, it will take a few years for GE Vernova’s growth rate to stabilize, and investors may be willing to pay a significant premium to 20x projected 2024 FCF to reflect that outlook. It will be worth watching when GEV WI begins trading on March 27 and GEV stock begins trading on April 2.

Should you invest $1,000 in General Electric right now?

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Lisa Maha Has no position in any of the stocks mentioned. The Motley Fool has no position in any stocks mentioned. Motley Fool has disclosure policy.

Three things you need to know if you buy GE today Originally published by The Motley Fool



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