GE previously announced that it was going to split their business up into three smaller companies. They have already completed spinning off GE Healthcare into a new entity and now they need to spin off the remaining two, GE Aerospace and GE Vernova (Power and Renewables). GE said the companies once split up would be valued higher individually rather than together as a conglomerate. Many investors liked the healthcare and aerospace businesses but were afraid of the losses piling up in GE’s renewable energy division and thus would not invest in the company. 

I started to wonder if splitting the power and aerospace businesses was still a good idea when I started to read the 10-Q released on Oct. 24th. I am going to use industry average Price Earnings ratios (P/E) and GE’s most recent results to see if the plan to complete the spinoffs still makes sense.

P/E ratios

P/E ratios are calculated by dividing the price per share by the company’s earnings per share. Investors use the P/E to compare companies by checking if one company’s price per dollar profit is higher than the others. We are comparing GE’s current price of $113.62 with a P/E of 12.3 to the theoretical prices that GE Aerospace and GE Vernova might get once they are independent companies.

Companies that have no earnings or that are losing money do not have a P/E ratio because there is nothing to put in the denominator. This doesn’t mean that companies that lose money don’t have value, just that it is difficult to use P/E ratios to compare them to their peers.

GE Vernova (Power and Renewable Energy)

GE Vernova as it is currently proposed will lose money. The renewable energy segment lost $1.4 billion in the previous 9 months compared to the power segment which made $928 million. GE executives cleverly combined these two so that the renewable energy will have a steady business propping it up until it either reaches scale or is sold off to a strategic buyer. 

Since Vernova will have negative earnings out of the gate, it is hard to place a value on it using a P/E ratio. I always like to assume the worst in these situations, that way when it happens, we are prepared. 

My guess is that GE Vernova will have a price of $0 per share when it is spun off. This is obviously too low for a business with a rather profitable power business, but again, this is a worst case guess.

The only way it makes sense to spin off GE Vernova from Aerospace is that the price per share of Aerospace without Vernova is higher than the current combined company.

GE Aerospace

Aerospace mostly makes engines for airplanes. This business generates profit margins around 20% and is considered quite lucrative. Over the previous 9 months GE Aerospace made $4.5 billion in profits. 

Aerospace businesses currently publicly trading have an average P/E of 24. If you give just the Aerospace business a P/E of 24 and assume the same amount of shares as the current business, it would be trading around $135. That represents a 18% premium over the current share price. 

Since we assumed Vernova had a value of 0, GE as it is currently constructed is being penalized at least 18% for having the Vernova businesses associated with it.

If Vernova has a positive value, the spin-offs make even more sense.

Conclusion

GE should complete the remaining spin offs. The Vernova business currently scares away aerospace investors who would most likely pay a much higher price than where GE is at today. The companies are worth more separate than they are together. 

Vernova will survive on its own at a much lower valuation thanks to the consistent Power business. It will take off if renewable energies become mainstream. I hope they do.