- Breaking up General Electric may unlock more value than previously estimated, Melius Research analysts wrote in a note Friday.
- Previous analysis of GE's individual businesses cast doubt on the benefit from a breakup.
- Melius finds that spinoffs from U.S. industrial companies return twice the value of the broader stock market.
The potential breakup of General Electric may unlock more value than previously thought, Melius Research analysts wrote in a note Friday.
Past looks at the value of GE's individual businesses — also known as a "sum-of-the-parts" analysis — cast doubt on whether a fire sale of GE's assets would even fetch today's price at $13.28 per share. But Melius found that spinoffs from U.S. industrial companies return twice the value of the broader stock market, revealing a more optimistic forecast for GE.
"GE's [sum-of-the-parts] as an example … likely undervalues the assets by 25 percent or more," Melius wrote.
Former industrial conglomerates are shedding assets due to pressure from both shareholders and activist investors, Melius found. Coupled with a "lack of interest in traditional conglomerates," more spinoffs from GE, Johnson Controls, Honeywell and others are likely in the near future, according to the firm.
These spinoffs have "historically created outsized value," Melius said. A spinoff removes what Melius called the bureaucratic culture that comes with a large conglomerate. Therefore, "even with lackluster" spinoffs, employees are reinvigorated and able to achieve greater efficiency than were ever probable under the conglomerate.
Spinoffs also get a boost from "the scrutiny of a new shareholder base," according to Melius. Taken out from under the wing of a conglomerate, a spinoff can no longer disguise financial results from investors.
Spring has sprung, and Wall Street is waiting to see if and how GE breaks up its businesses. The stock has slid 23 percent since January, when GE first announced a review of its GE Capital insurance portfolio.
"[These] problems preclude the company from moving forward as previously planned, even a few months ago," J.P. Morgan analysts wrote in a note Jan. 17.
Then came the SEC investigation into GE's accounting practices and the U.S. Justice Department investigation in connection with subprime mortgages.
J.P. Morgan's sum-of-the-parts analysis said, before the investigations were announced, that there may be "many dis-synergies not incorporated" in its analysis of GE. Those unknown risks may justify a further degraded value, between $12 and $16 per share.
With GE shares trading Wednesday at the lower end of Wall Street's previous estimates, a breakup looks increasingly positive for GE's investors. In Melius' view, those spinoffs are one of the best ways forward if the company's shareholders are going to recoup value lost from the decline of a once-dominant American conglomerate.
— CNBC's Morgan Brennan contributed to this report.