Analyst: General Electric Just Took A 'Couple Of Steps Backward'

General Electric Company GE jumped more than 4 percent Friday after the company announced a restructuring of its upcoming Wabtec transportation spin-off. The market took the news as a positive for the stock, but one analyst said investors may be missing the big picture.

The Analyst

JPMorgan analyst Stephen Tusa reiterated his Neutral rating and $6 price target for GE.

The Thesis

On Monday, Tusa said the new Wabtec spin-off deal is mathematically a negative revision when it comes to shareholder value. Under the original terms of the spin-off, 49.9 percent ownership of Wabtec would to to Wabtec shareholders, 40.2 percent would go to GE shareholders and 9.9 percent would go to GE. The new deal gives 50.8 percent ownership to Wabtec, 24.3 percent ownership to GE shareholders and 24.9 percent ownership to GE. GE will also receive about $3.4 billion in cash as part of the deal, but Tusa said the company is sacrificing too much value in exchange for that cash.

“Simply, the shareholder thought they were getting $11.1-11.2 B in ‘value,’ with ~$6.6 B coming either through a split or spin, and some cash that is already committed to stand on the balance sheet to help reduce leverage, or go to obligations such as pension or GE Capital, and now ‘value’ is $9.6 B, with a total of ~$6 B going to the balance sheet (pre-tax),” Tusa wrote in a note.

He said the theoretical sum-of-the-parts value calculation for GE comes out as a net positive, but shareholders are unlikely in a position to realize that increase in value.

“In other words, mechanically, the equity value to the shareholder goes down by ~$4 B/~$0.50 per GE share (tax impact will vary),” he wrote.

Tusa said the new deal is a “couple of steps backward” for GE, and GE will only show be a true value opportunity for investors when it demonstrates genuine improvement on the cash flow and earnings fronts.

Price Action

GE traded down 3.6 percent Monday at $8.82 per share.

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