GE, the world's second-largest company by market capitalization behind Exxon Mobil, has diverse operations ranging from manufacturing jet engines to commercial lending to NBC media.
Sprague said that after spinning off ill-fitting businesses, a new, leaner GE would have 2008 earnings of about $16.5 billion, or $1.63 per share. At a valuation of 18.5 times estimated earnings, GE could trade at $30 to $31 per share, he said, while the pieces to be spun off could have a collective value of $12 to $14 per share.
"We believe a (total) value above $45 could be achieved, given the possibility of a higher multiple on the new core company or takeover premiums on the spun-off pieces," Sprague said.
Complex Structure
Sprague said GE's complex structure has been a distraction and that spinning off the units would create a more focused company that investors could more easily understand.
"The new, smaller GE would still be a $125 billion (2007 estimated) sales giant that would continue to enjoy the size and scope benefits that are integral to its global competitive advantages today," he said.
Earlier this week, GE Chief Executive Jeff Immelt said he found the lagging performance of the company's shares versus major U.S. indexes "frustrating."
"Is it frustrating? Sure it is, but the thing investors will always respond to is consistent earnings growth," he told reporters before the company's annual meeting on Wednesday.
Immelt became CEO in September 2001.
"We believe CEO Immelt and team have done an excellent job playing the hand they were dealt," Sprague said. "Nevertheless, the stock has chronically underperformed and at the end of the day GE has to deliver shareholder returns."
In the face of limited movement in the stock, some investors have said they would like to see GE accelerate the pace of stock buybacks or find other ways to return equity to shareholders.
Others Disagree
Despite Sprague's call for GE to break apart, other analysts have previously argued that GE's breadth and international exposure should enable it to ride out any slowdown in the U.S. economy and take advantage of a weaker dollar.
"The story this year is going to be a weak domestic economy, driven by weakness in housing and automotive and so forth, and growth abroad. It's all about international exposure." said Shawn Campbell, principal with Chicago-based Campbell Asset Management, which owns GE shares.
Campbell said the cry to split apart GE is just another fad in the Wall Street cycle of trends.
"You get through these periods where it's like 'Get big. Have a diversified portfolio. Buy all these things.' You go on this M&A spree," Campbell said. "When that plays out and there's no one left to buy, then you say, 'Diversification, getting big, that's not what you want to do. What you really need to do is break up and focus."'
Richard Steinberg, president of Steinberg Global Asset Management, a Boca Raton, Florida-based asset management firm that owns about 131,000 GE shares, called Citigroup's research report "the classic conglomerate discount research piece."
"This piece is long overdue. I don't think it will come to anything. It shows that there are parts of the business that get tougher for GE to decide what becomes fuel for growth and what becomes engines of growth," Steinberg said.
No Pressure
"Management is aware that the underperformance has been an issue, but I don't get a sense that they will feel the pressure to break the company up," Steinberg said.
Sprague acknowledged in his report that there are no signs that GE has any plans to pursue a break-up, but he said he thinks shareholder pressure will intensify.
"We have always held the view that GE is greater than its sum of the parts because it leverages people, capital and vertical market expertise well," Sprague said. "However, we also believe that certain pieces of the portfolio really don't fit per se and if exited could create upside for the remaining GE and spun-off pieces."
The recent lagging performance at NBC has been a distraction to GE as a whole, Sprague said. As an independent business, NBC could pursue acquisitions or sell itself to a larger media entity.
GE Money, a financing and lending business, earns about 75% of its earnings internationally. As an independent company, it could pursue more aggressive growth than it can now, he said.
GE Real Estate holds more than $53 billion in assets, which Sprague described as a "nice stand alone business." The unit benefits from strong management, but a spinoff could be complicated by whether or not the business could be converted into a real estate investment trust structure.
