What Investors Need to Know About GE’s Spinoff

On April 2, General Electric GE spun off its clean energy business as GE Vernova. Each GE shareholder is receiving one share of GE Vernova for every four shares they hold of GE.

GE Vernova is trading under the ticker GEV on the New York Stock Exchange, while the remaining company, GE Aerospace, is continuing to trade under GE.

On Tuesday, Morningstar reinitiated coverage of GE Aerospace. For the current take on the outlook for GE Aerospace and GE stock, click here.

Key Morningstar Metrics for General Electric

• Morningstar Rating: 2 stars
• Fair Value Estimate: $156.00
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 0.18%

GE Aerospace

GE Aerospace held its investor day on March 7. Ahead of the spinoff, our fair value estimate for the still-combined company is $156 per share. Embedded in our valuation is our conviction that GE Aerospace will be worth nearly $140 billion, while GE Vernova will be worth nearly $35 billion on an equity value basis. We point out that GE Vernova’s balance sheet will be in a net cash position, meaning the firm will receive a cash contribution from GE but no debt.

Perhaps the biggest surprise in GE’s materials is its commitment to a new capital allocation framework, which we were expecting after the separation. The aerospace business is committed to returning roughly 70%-75% of its “available cash” to future dividends and repurchases. We interpret that ratio as a proportion of its free cash (not operating cash), meaning the proportion of cash returned to shareholders after GE Aero services its organic investments. That makes sense, given the large investment necessary to serve GE Aero’s promising growth opportunities, including open fan (RISE) and hybrid electric technology on the commercial side and adaptive technology (the next-generation fighter program) on the defense side.

Consequently, we expect capital expenditures will rise during our explicit forecast and ramp up as a percentage of sales as we march toward 2030. Even with ramping capex, however, we agree with management’s assessment that free cash flow conversion will total 100% over the long term, in line with our midcycle projection.

We like the emphasis on returning capital to shareholders, particularly given the restored dividend of about 30% of GE Aero’s net income (subject to the standalone board’s approval). We greatly prefer management allocating capital to the dividend, since GE trades at a slight premium to our fair value estimate. We currently project GE will repurchase one-fifth of its expected $15 billion buyback authorization over the next three years, or about $1 billion per year. That said, the valuation impact is negligible.

Spinoff Preview: GE Vernova

GE Vernova held its inaugural investor day on March 6. Over the long term (by 2028), Vernova expects to increase organic sales at a mid-single-digit compound annual rate, achieve a 10% adjusted EBITDA margin, and convert free cash flow at a 90%-110% rate.

We largely agree with these targets and Vernova’s trajectory to get there. For now, however, we expect more high-single-digit organic growth for the firm in the back half of the decade on the demand pull from the Inflation Reduction Act. Reasonable minds could disagree, and the notoriously conservative management team said these targets are a starting point, suggesting potential upside. However, if the trade-off meant underwriting less-profitable projects, we’d much prefer that Vernova stick to its more moderate sales outlook to avoid the mistakes of old.

Much of our confidence in management’s margin and cash outlook stems from the lean tools the company has adopted since Larry Culp took the helm at GE and Scott Strazik took the reins at the power business. The results of these efforts are evident in continued strength in gas power and inflecting margins in the grid and onshore wind. Until recently, those businesses were unprofitable. The more certain legislative backdrop has allowed Strazik and his team to rightsize the business for the appropriate level of demand. Furthermore, less-favorable international backlog in offshore wind should roll off over the next few years, while much of power’s total backlog is built on higher-margin services.

We believe GE Vernova is poised to preserve its leading position within a small oligopoly in the energy transition.

Nicolas Owens contributed to this article.