General Electric's Split Valuation Analysis

General Electric's upcoming split into two businesses - one focused on aircraft engines and the other on power generation - has investors pondering the worth of each entity.

Market Comparison

As of now, General Electric is trading at approximately 14.5 times the projected 2024 EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). While this aligns with other nonfinancial and manufacturing firms in the S&P 500, this benchmark will soon be outdated post-split.

GE Aerospace: Premium Valuation Expected

Following the split, GE Aerospace will retain the "GE" stock symbol and is anticipated to be highly regarded on Wall Street. Typically, aerospace and defense stocks in the U.S. are valued at around 18 times estimated 2024 EBITDA. However, noteworthy variances exist based on growth prospects and profit margins.

Growth Prospects

Companies like Heico trade at 26 times EBITDA, boasting consistent annual sales growth exceeding 10%. GE Aerospace is poised to achieve organic sales growth of 4% to 5% annually, driven by market expansion in global aircraft fleets.

Valuation Breakdown

At 18 times estimated EBITDA, GE Aerospace is anticipated to represent a significant portion - approximately 85% to 90% - of the total value of the pre-split General Electric. This leaves an estimated value of $20 billion to $30 billion for GE Vernova, encompassing gas power, wind turbine, and electricity-grid operations.

Evaluating Vernova's Value

Valuing Vernova proves to be a challenging task, especially when comparing it to GE Aerospace. One of the reasons for this difficulty is Vernova's ongoing efforts to enhance its underperforming business units. Additionally, while there are other companies with similar offerings to Vernova, none offers the full spectrum of services provided by Vernova. Most notably, the companies that closely resemble Vernova are U.S.-based.

Comparative Landscape

Japanese-based Mitsubishi Heavy Industries is known for its gas turbines but also engages in various other activities. Similarly, Schneider Electric operates in the power grid sector, boasting significantly higher margins than GE's grid business. On the other hand, Siemens Energy and Vestas Wind Systems are focused on wind turbine production, offering some insights to potential investors but exhibiting dissimilar trading patterns.

Industry Benchmarking

Alternatively, one could assess Vernova's value by looking at U.S. manufacturing companies, which typically trade at an average of around 12 times the estimated 2024 EBITDA. This metric serves as a target for GE Vernova to aspire to as it pushes towards margin improvement and seeks to reverse the losses incurred by its wind turbine business.

Financial Outlook

Despite not achieving a net profit in 2023, GE Vernova managed to generate positive free cash flow amounting to roughly $440 million. Expectations point towards a significant improvement to approximately $900 million in 2024. Moreover, EBITDA for 2023 stood at around $800 million, projected to soar to a range of $2.2 billion to $2.4 billion in 2024.

Future Prospects

Interestingly, the EBITDA forecast suggests a margin of about 6% to 7% for 2024. Vernova will ultimately need to attain double-digit EBITDA margins to position itself for a higher valuation multiple.

Investor Insight

Insights on Vernova's strategic roadmap towards achieving these goals will be unveiled at an investor day event scheduled in New York on Wednesday, offering stakeholders valuable clarity. Similarly, investors will gain insights from GE Aerospace management on Thursday.

Stock Performance

Reflecting on recent stock performance, GE shares have surged approximately 90% over the past year through Friday trading. In contrast, the S&P 500 and Dow Jones Industrial Average saw gains of around 27% and 17%, respectively.