GE | GENERAL ELECTIC FUNDAMENTAL ANALYSIS | MUST READ...

Over the past ten years, General Electric has steadily simplified its operations by selling or spinning off many non-core businesses.

Now the famed industrial conglomerate has decided it no longer wants to be a conglomerate. On Tuesday, GE announced it was about to split into three separate publicly traded businesses, each specializing in one market. Here's why this could open up great prospects for GE stock over the next few years.

Back in June 2018, GE stated that it would sell about 20 percent of its health care business through an initial public offering (IPO) and transfer the rest to GE shareholders. At the time, the company also told investors that it intended to gradually monetize its controlling stake in oilfield services giant Baker Hughes.

These moves were part of GE's broader plan to address its huge debt load. In addition to generating cash proceeds of $20 billion or more from the sale of its stakes in Baker Hughes and the health care division, General Electric planned to transfer $18 billion of debt and pension obligations to the health care division as part of the spin-off.

GE continued its plan to sell its stake in Baker Hughes. It expects to sell its last shares by 2023. In contrast, in early 2019, the company postponed its intention to spin off its healthcare division after reaching an agreement to sell its biopharmaceutical division (a small but fast-growing and ultra-profitable part of GE Healthcare) to Danaher for about $21 billion.

This week's news brightens a plan to spin off the GE Healthcare division as a separate public company. But unlike the 2018 plan, General Electric now plans to merge its energy, renewable energy, and digital companies and separate them as well. That way, GE will remain a pure aviation company.

As the first step in this separation, General Electric plans to separate its healthcare business in early 2023. The new healthcare company will issue debt - the amount has not yet been determined - and GE will use the proceeds to pay off some of its corporate debt. In addition, GE will retain a 19.9 percent stake in the health care division, which it could sell over time to raise additional capital for debt reduction or other strategic purposes.

In the meantime, GE will work on the process of merging its power, renewable energy, and digital technology divisions to prepare them for an independent future. This will allow it to separate a new energy-focused company in early 2024. The aviation business will receive legacy liabilities, such as GE's retiring insurance business, as well as the company's remaining stakes in Baker Hughes and AerCap.

GE expects about $2 billion in one-time separation costs and less than $500 million in tax liabilities due to the separation into three public companies. It is important to note that management does not expect long-term dyssynergia. The savings from eliminating the conglomerate's corporate overhead should fully offset the additional costs incurred by the healthcare and energy businesses as independent companies.

General Electric's health care division performed well during the pandemic, and the recovery of the aviation division is beginning to accelerate. So now is a good time to split GE into separate aviation, healthcare, and energy companies.

Splitting a conglomerate usually results in better fundamentals for successor companies. Each company's management can better concentrate on the key drivers of business development. In addition, it is easier to develop incentive compensation schemes for a strong performance by an independent company than by a subsidiary.

In addition, GE's business segments have very different financial profiles. Consequently, GE stock typically trades at a discount to the sum of its parts. In particular, the energy businesses have lower profitability and collectively have less growth potential than GE's aviation and medical divisions. Their inconsistent results and slow turnaround over the years have negatively impacted GE's stock performance.

Given its consistently strong results and growth prospects, GE Healthcare division is likely to achieve high valuation as an independent company. And by 2024, GE Aviation will be operating at full capacity and will also earn a high valuation. Together, they are worth more than the current enterprise value of GE, which means that GE stock should climb as the company begins to implement its separation plan. Any benefit shareholders will receive from the separation of the energy division will only be an add-on.