3 Things You Need to Know If You Buy General Electric Today

By now, most General Electric (GE 0.04%) investors will likely know that the company is about to split into two parts. GE Vernova will begin trading on April 1, while the rest of the business, to be called GE Aerospace, will retain the GE ticker. In advance of that event, it would be a good idea to run through a few items that investors might find helpful.

Details behind the spinoff

The record date for the spinoff is March 19; holders of GE stock will receive one share of GE Vernova for every four shares they hold in GE. For example, if you hold 100 shares in GE, you will receive 25 in GE Vernova. Naturally, the 100 GE shares you will still hold (which will now be GE Aerospace) will drop in value on April 2 to reflect that the businesses becoming GE Verona are no longer part of the parent company.

However, that’s not the whole story of the spinoff because investors can get approximations of how the market values each business before April 2. This is because there will be different trading markets for GE and GE Vernova from March 27 and continuing through April 1.

• “When issued” trading in GE Vernova will run from March 27 through April 1 under the symbol “GEV WI.”
• GE Vernova will begin regular trading on April 2 under the ticker “GEV.”
• GE will trade in a “regular way” under the ticker “GE” and holders of those shares will have the right to receive GE Vernova stock through April 1.
• GE shares will trade as GE Aerospace from March 27 through April 1 under the symbol “GE WI,” but those shares will not include the right to receive GE Vernova stock.

While all of this may sound complicated, the key takeaway is that by monitoring the market valuations on GEV WI from March 27, investors will be able to see how the market is valuing GE Vernova. Similarly, monitoring GE WI will tell you how the market values GE Aerospace on its own. In this way, retail investors can prepare for the “regular way” listings on April 2.

GE Vernova is the more exciting stock

Ge Vernova will own GE’s power (primarily a gas turbine equipment and services business), renewable energy (onshore wind and offshore wind), and electrification (electrification systems and software) segments.

I’ve covered this business at more length in a previous article outlining the case for a $27.3 billion valuation for the GE Vernova spinoff and provided an estimated value for GE Aerospace previously, too.

My GE Vernova estimate may prove conservative because it has plenty of growth potential. The table below shows each segment’s earnings before interest, taxation, depreciation, and amortization (EBITDA). I’ve conservatively interpolated management’s guidance to estimate 2024 EBITDA for power and electrification.

Data source: GE presentations plus author’s analysis. *Management forecasts mid-single-digit percentage revenue growth with 100 basis points of margin expansion. **Management forecasts low-double-digit percentage growth in revenue and mid-single-digit percentage margins.

The critical point is that the power and electrification segments are now solid earnings and cash-flow generators, driven by gas turbine equipment services and ongoing demand to connect renewable energy sources to the grid (electrification).

However, the key to the investment case is the company’s drive to improve the wind segment’s profitability, not least by running down the backlog of less-profitable offshore wind contracts. That backlog was $6 billion at the start of 2023, and down to $4 billion by the end of it.

Image source: Getty Images.

In recent years, the offshore wind industry has suffered as wind power companies, including Siemens Energy and Vestas, have struggled with soaring raw material costs and supply chain difficulties. At the same time, they’ve been working through contracts they inked in far less inflationary times.

As such, GE’s management is focused on working through the backlog while improving the profit margin by being highly selective about new contracts. It’s a strategy that worked in its onshore wind business, which turned profitable in the third quarter of 2023.

GE Vernova’s valuation

GE Vernova’s management believes its free cash flow (FCF) will grow. These figures follow on from the dramatic increase in earnings outlined above. For reference, a mature industrial company with top-line growth in the low single-digit percentages is often considered fairly valued at around 20 times FCF.

Data source: GE Vernova presentations.

Still, with a dramatic increase in offshore wind’s profitability to come, it will be a few years before GE Vernova’s growth rate settles down, and investors may be willing to pay a significant premium to the 20 times estimated FCF in 2024 to reflect that prospect. It’s something to watch out for when GEV WI starts trading on March 27 and when GEV shares begin trading on April 2.