Shedding GE Capital could benefit GE's valuation
By Dan Burns
April 10 (Reuters) - General Electric Co's move on Friday to shed most of its GE Capital unit over the next few years could finally reward the patience of shareholders who have endured years of holding a market laggard.
GE Capital's elephantine presence has long kept the conglomerate trapped between two worlds where its valuation was concerned: cheap for an industrial stock but rich for a bank.
"Essentially, GE has been treated like a bank by investors," said Charles Sizemore, chief investment officer of Sizemore Capital Management in Dallas. "Going forward, it should trade a lot more like the industrial powerhouse it is."
Refocusing the company around its industrial base could mean as much as 16 percent upside for the stock by closing the valuation gap against peers like Honeywell International Inc and United Technologies Corp, a Reuters analysis of valuation data shows.
That alone could propel the shares back above $30, a level GE has not breached since August 2008.
The last year that GE outperformed the wider market and its two peer groups - industrial and financials - by 2 percentage points or more was 1999, and it has had just one year of modest outperformance in that span.
Moreover, since Jeff Immelt took over as chief executive officer in September 2001, its shares had fallen more than 36 percent through Thursday's close. Both the Standard & Poor's 500 and industrial sector had risen 89 percent, and financials had fallen 4.25 percent.
GE shares rocketed higher on Friday following the announcement, up as much as 9.2 percent in their biggest one-day gain since March 2009.
"GE stock has been an underperformer for a long time, due in no small part to investor unease about GE Capital," Sizemore said.
Over the last four years, GE Capital has accounted for 30 percent of GE's annual revenue but 51 percent of its after-tax income. While GE Capital revenue has fallen 14.4 percent since 2011, revenue from the balance of GE's businesses is up 9.2 percent.
The company's status as a hybrid kept the stock mired at a discount to its industrial peers.
At Thursday's close, GE shares traded at 14.3 times 2015's estimated earnings per share, Thomson Reuters StarMine data shows, and they were cheaper than more than three-quarters of the company's peers in the S&P industrial sector index .
Honeywell, which competes against GE across a range of businesses, trades at a forward price-to-earnings multiple of 16.7, while rivals United Tech and Boeing Co sport multiples of 16.4 and 17.4, respectively.
As a bank, however, GE stock was pricey, hampering prospects for it to narrow the gap with other industrial giants. The stock was more expensive than all but two of the banks and investment banks in the S&P 500, whose multiples hover closer to the 10 handle.
Divesting most finance operations could also relieve the stock from the valuation penalty assigned to most banks for the growing burden of financial regulation, which has added to costs while limiting their growth.
"Shedding GE Capital, which is regarded as too big to fail, would allow General Electric to avoid strict regulatory requirements imposed after the financial crisis," said Antony Filippo, an independent investment manager in Toronto. "Plus, it will reduce risk and simplify their business, which is great news for stockholders." (Reporting and writing by Dan Burns; Additional reporting by David Gaffen, Saqib Ahmed and Jennifer Ablan; Editing by Lisa Von Ahn)
