The sum of a company's parts doesn't always equal the whole. In General Electric's (GE) case, a new analysis by me and my students concludes that its parts are worth about 16% more than its current value.
The stock hasn't performed well since Jeff Immelt took over as CEO back in 2001, falling 58% since then. But in my previous assessments -- in July 2007 and February 2008 -- I'd concluded that the stock was still trading pretty near the added-up value of GE's parts.
That changed when GE's value fell still further. Shares on Thursday closed at $16.35, nearly 52% below their $34.02 price the day of my 2008 BloggingStocks post. And my students and I estimated that buyers might pay a total of about $203 billion for GE's five business segments, far more than GE's current market capitalization of $175 billion would imply.
Breaking It Down
Here's our breakdown of each of GE's pieces:
Energy Infrastructure: $112.1 billion. This business unit, which sells power plants and other energy-generating equipment, is expected to generate 2010 sales of $35.4 billion on net income of $4.9 billion. (We arrived at the sales estimate by extrapolating GE's first nine months of revenue -- $26,554 million -- to the full year and estimated net income by subtracting this segment's share of corporate expenses from that revenue estimate.) Multiplying the estimated net income by 23, the price-earnings ratio of comparable publicly traded companies, yields an estimated market value of $112.1 billion.
Technology Infrastructure: $67.2 billion. We expect this unit, which sells railroad cars, medical equipment and aircraft engines, to generate 2010 sales of $35.9 billion on net income of $4 billion. Multiplying its estimated net income by 16.7, the price-earnings ratio of comparable publicly traded companies, yields an estimated market value of $67.2 billion.
GE Capital: $7.6 billion. We estimate GE Capital, which finances the purchase of products in the previous two segments and offers consumer financial services, to generate 2010 sales of $48.3 billion on net income of $544 million. Multiplying its estimated net income by 14, the price-earnings ratio of comparable publicly traded companies, yields an estimated market value of $7.6 billion.
NBC Universal: $16.4 billion. NBC Universal, which produces TV programs and movies and runs theme parks, is expected to generate 2010 sales of $16.2 billion on net income of $1.06 billion. Multiplying its estimated net income by 15.5, the price-earnings ratio of comparable publicly traded companies, yields an estimated market value of $16.4 billion.
Business & Home Solutions: $0. We estimate this unit, which sells light bulbs and appliances, to generate 2010 sales of $8.4 billion and a net loss of $17 million. While this business likely has some value, it's harder to assess and we assumed it to be worthless to investors for the purposes of this analysis.
This is only a rough analysis, which doesn't separately assess the value of different segments -- such as light bulbs, aircraft engines and so on -- within each official business unit. Moreover, this analysis does not take into account what would happen to GE's $308 billion in long-term debt some of the pieces were sold off.
The Weakest Links
Still, it appears that it would make sense to break up GE into pieces and sell the parts with the weakest position in GE's portfolio.
To rank these segments, my students compared them based on their industries' profit potential and their competitive positions within their industries. Based on this analysis, GE's two most valuable pieces -- the ones that GE ought to keep at all costs -- are its Energy Infrastructure and Technology Infrastructure segments.
GE ought to ditch the entire NBC Universal unit, which has low inherent profit potential -- based on the industry -- and a mediocre competitive position. Its Business & Home Solutions unit is similarly unattractive.
Its GE Capital business also would be a good one to sell, except that it would be hard to separate it out from the attractive infrastructure pieces. Moreover, given GE's big portfolio of bad mortgages, it's hard to tell whether anyone would want to buy that business.
In fact, because of the lack of liquidity in the private-equity market these days, investors probably wouldn't be too interested in helping GE unload any of its less attractive parts. So GE shareholders will be in for a long wait before that value can be unlocked.
When GE's CFO, Keith Sherin, asked me what I thought would boost GE's stock value back in July 2007, I argued that it should ditch everything but its infrastructure businesses. If GE had acted then, it might have been able to find a buyer for these units before the financial crisis, when capital was available for such private-equity deals.
Now GE is stuck with too much corporate baggage that could be tough to unload. Shareholders may have to wait until GE's board acts to install management that cares about boosting GE's stock price back to where it was -- or above where it was -- when Jack Welch bequeathed his legacy to Jeff Immelt.
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