Good value even during a breakup

General Electric (NYSE:GE) is going through a major transformation, and investors have made it clear that they are not happy about it. But this isn’t necessarily a sign that General Electric is in real trouble. Rather, this is just a textbook example of how the market hates change and uncertainty.

Not all change is bad, and uncertainty is usually replaced by certainty sooner or later. As a result, it’s a bold move, but investors can get good value right now while the market frets about GE’s transition to a potentially more efficient and better business.

Rescue a fallen icon

Larry Culp, CEO of General Electric, has a difficult task to say the least. He is tasked with saving a company that has been in decline for years due to the mistakes of its previous CEO.

Again, the biggest companies in the U.S. stock market haven’t always been all technology companies. Thirty years ago, General Electric was one of the giants of Wall Street, but as we move into the 2020s, the company has become an afterthought in the financial media.

Part of the problem was that GE was trying to do too many things at the same time. Along with manufacturing light bulbs and appliances, the company also sought competition in the aerospace, energy and even medical sectors.

Culp is turning that around about a year ago when General Electric spun off its healthcare division into GE HealthCare Technologies (NASDAQ:GEHC). General Electric also plans to spin off its energy and aerospace businesses (GE Vernova and GE Aerospace, respectively) into separate entities in April.

Here’s the problem. GE just released its fourth quarter 2023 earnings and first quarter 2024 financial outlook. In the data and guidance, the company included GE Vernova and GE Aerospace along with all other business units of the combined entity.

General Electric forecast earnings of 60 cents to 65 cents per share for the first quarter of 2024. Meanwhile, analysts expected quarterly earnings of 70 cents per share. GE reported “high single-digit revenue growth” in the first quarter, although Wall Street expected revenue growth of about 6%.

Therefore, investors may not be satisfied with the company’s near-term financial guidance. But they shouldn’t put too much emphasis on this. It didn’t take long for General Electric to separate its energy and aerospace divisions.

What this means is that while disappointed investors are focused on the near future, they should focus on what they see one, five, or 10 years from now after General Electric breaks up. Culp is making difficult choices now to secure GE’s future. As a result, if the company (or more accurately, the corporation) can succeed as a separate business unit, it could be a big win-win for GE’s stakeholders.

Good results and good value

Moreover, it feels like the market is simply ignoring General Electric’s overall strong fourth quarter financial performance. The company generated $18.5 billion in quarterly revenue, surpassing Wall Street’s call for $17.2 billion.

Additionally, General Electric also reported fourth-quarter adjusted earnings per share (EPS) of $1.03, while analysts expected the company to post earnings of 90 cents per share. Moreover, GE’s adjusted EPS results represented a significant improvement over the prior-year quarter’s adjusted earnings of 66 cents per share.

Wall Street also expected General Electric to report free cash flow of $2.9 billion in the fourth quarter, but the company beat that by reporting free cash flow of about $3 billion. Since these results include all the divisions currently included in General Electric, the market should understand that the company is not performing badly from a financial perspective.

But sometimes it can be difficult to keep investors happy. On the morning of January 23, GE stock immediately fell 2% after investors absorbed the company’s results and guidance. Although it is not a sharp decline, it may still be an irrational reaction due to fear of an unknown future.

Finally, we should point out that General Electric is currently valued quite reasonably. The company’s price-to-earnings (P/E) ratio on a 12-month GAAP-measured basis is 13.7. This is well below the industry’s average P/E ratio of around 23.

As a result, there is no need to fear uncertainty like the market. Under Culp’s leadership, General Electric could begin a new chapter and, ironically, emerge stronger after the breakup.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.