In addition to lowering the risk of needing another government liquidity backstop in the event of another financial crisis, GE hopes to unlock value for investors through the consumer finance spinoff.
GE's stock closed at $27.20 Friday. The stock traded for 15.3 times the consensus 2014 earnings estimate of $1.78, among analysts polled by Thomson Reuters.
Deutsche Bank analyst John Inch on Monday reduced his 2014 EPS estimate for General Electric to $1.72 from $1.85, to factor in the IPO for the consumer finance business, while introducing a 2015 EPS estimate of $1.87. He reiterated his "buy" rating for the shares, while raising his price target to $32 from $28.
Even with the significant increase in his price target, Inch wrote in a note to clients that his price target, based on an expanded multiple of 17 times Deutsche Bank's 2015 EPS estimate, "would be lower than our multi-industry coverage universe average valuation by roughly 1 turn.""This appears reasonable considering GE's favorable attributes including elevated organic growth prospects based on backlog expansion, high cost-cutting runway/opportunity and accelerating return of capital to shareholders," he wrote. According to Inch, GE's multi-year cost-cutting efforts is in the "early innings," when compared to other industrial giants, including Honeywell (HON) and Dover Corp. (DOV), implying further upside over coming years. William Blair analyst Nicholas Heymann on Monday reiterated his "market perform" rating for GE, with a price target of $27, but was also quite positive in his comments in a note to investors about the planned consumer finance spinoff. Heymann noted that GE had already returned $12 billion in excess capital to investors through dividends and share buybacks, "out of a targeted $20 billion-$30 billion." He also provided another eye-popping number, writing that the following the consumer finance unit's IPO, "the subsequent [tax-free] share exchange could return $16 billion-plus tax-free to GE shareholders." GE on Friday said it expected to grow its earnings-per-share in 2014 and 2015, as the company expects that "gains will equal restructuring."
What might the spin-off mean to competitors?GE is the largest private label credit card lender, with a portfolio of about $36 billion as of Sept. 30. "Given the size and private label focus of GE's current operations, we feel that the implications are fairly limited to certain names in our coverage universe, namely Capital One (COF) and on a smaller scale Alliance Data (ADS)," KBW analyst Sanjay Sakhrani wrote in client note on Friday.
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