General Electric: Analysis of a Break-Up Call (GE)

Citigroup’s Jeffrey Sprague has issued a research note basically calling for General Electric (GE-NYSE) to partially break-up in Wall Street’s "Quest to unlock shareholder value."  They are calling for GE to spin-off its NBC and GE Money units, as well as its real estate holdings to unlock value.  This notes the sideways stock performance over 5 years despite solid underlying execution.  This notes the size and complexity working against investor interest and that has gone to further valuation erosion.

Sprague estimates that the new leaner GE would post 2008 results with $16.5 Billion and roughly $1.63 EPS.  With an 18.5 P/E, that would generate a $30.15 value to core-GE, and the spin-off assest could fetch $12.00 to $14.00 per share.  So it thinks this would unlock the totals to roughly $45.00.  The note says that core-GE would do $125 Billion in sales and notes that the real estate holdings are more than $53 Billion.

The note says that Immelt has done an excellent job on execution but the stock has been flat.  This argument has been made more than once, but a friendly reminder should be made that Immelt took over a week before September 11, 2001 and no one needs to be reminded that the economy was in the tubes for more than a year after that.  In fact, GE traded down under $23.00 at the start of 2003.  So the 5-year picture is bleak and that is not deniable; but if you bought 3-years ago you would be up more than 50% without considering the dividends (dividend adjusted lows were closer to $21.00).  Just yesterday we noted that the stock had been dead and the board of directors was in a bind and gave some added color on it.  The company is already in the process of unloading its plastics unit, and that is expected to fetch more than $10 Billion.

Wall Street has been selling this notion for some time, and with some success.  The good news is is that they stopped short of saying the current structure is more like "General Eclectic."  GE’s shares are up 1.7% to $35.45 on the day.

Jon C. Ogg
April 27, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.