Skip to main content

GE Aerospace(GE-N)
NYSE

Today's Change
Real-Time Last Update Last Sale Cboe BZX Real-Time

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

Motley Fool - Wed Mar 27, 7:00AM CDT

By now, most General Electric(NYSE: GE) 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.

Offshore wind.

Image source: Getty Images.

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.

GE Vernova Segment

2022 EBITDA

2023 EBITDA

2024 EBITDA (Estimate)

Power

$1.7 billion

$1.7 billion

Approximately $2 billion*

Wind

($1.7 billion)

($1 billion)

Approaching profitability

Electrification

($200 million)

$200 million

Approximately $350 million**

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.

An investor researching.

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.

GE Vernova

2022

2023

2024 (Estimate)

2025 (Estimate)

Free cash flow

($600 million)

$100 million

$700 million to $1.1 billion

$1.2 billion to $1.8 billion

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.

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

Before you buy stock in General Electric, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and General Electric wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.

See the 10 stocks

*Stock Advisor returns as of March 25, 2024

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

More from The Globe