General Electric. Co. (GE) rose slightly on Tuesday, Oct. 9, as the appointment of new Chief Executive Officer Larry Culp and the likely write-down of $23 billion of GE Power goodwill is likely to be the last of a series of transformation announcements and sets the stage for a new chapter in its turnaround, according to William Blair.
The Boston-based industrial announced last week that Culp was replacing John Flannery at the helm of the beleaguered industrial conglomerate, which sent the stock soaring. Under Flannery, GE sold billions of dollars in assets, cut the dividend in half and reshaped the portfolio to focus on aviation, power and renewables. Troubles in the company's power unit, however, plagued Flannery throughout his 13 months as CEO. Still, Culp remains "committed to strengthening the balance sheet," including deleveraging, in order to "unlock the value of GE."
"We believe Mr. Culp's exceptional reputation and performance contract tied to GE's share appreciation, along with a final Power goodwill write-down, is likely to shift investors' focus to value GE based on its potential [sum of the parts] valuation from the recent focus on near-term adjusted EPS, free cash flow generation, and/or dividend yield and dividend sustainability," Nicholas Heymann wrote in an Oct. 9 research note.
Heymann estimates that the company's SOTP valuation, without assuming value for GE Power, could be 7% to 23% above the current share price, which equates to approximately $14.60 to $16.78 per share. If GE Power were assumed to be worth its $48 billion book value, GE's SOTP valuation might be closer to $20.10 to $22.30 a share, Heymann said.
"If GE were to sell a large minority stake in GE Digital for $10 billion, this could be closer to $21.25 to $23.45," Heymann said. The Wall Street Journal reported in late July that GE has hired an investment bank to run an auction for key parts of its digital unit.
Shares of GE rose 0.8% to $13.72 at 11:30 a.m. New York time.
With Culp at the helm, the company now moves into phase two of its turnaround, Heymann said, which focuses on risk reduction, specifically debt reduction, resolution of pending litigation and government oversight investigations and significant, material reductions in pension and retiree benefit underfunding as well as underfunding for long-term healthcare reinsurance at GE Capital. Heymann expects GE to move to phase three, which is the return to growth, in 2019 and beyond.
William Blair maintained its Outperform rating on the stock.
There are eight Buys, 12 Holds and three Sell ratings on the stock, according to Bloomberg data.