GE's $87 Billion Share Price Windfall Threatens Spinoff Gains

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(Bloomberg) — General Electric Co. shares have powered to a more than six-year high, adding some $87 billion in value on bets that the company’s second and final spinoff will deliver a boon for investors. But, further gains may be tough to find.

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The stock’s more than 85% surge in the past year comes as Chief Executive Officer Larry Culp navigates the challenge of breaking up the industrial giant and reignites investor enthusiasm. With shares nearing Wall Street’s 12-month consensus target, the trade however is getting crowded.

“Amidst the substantial rally, investors should approach further gains with caution,” says Jim Osman, founder of the Edge Group, a research firm focusing on special situations. “While the separation heralds two impressive entities, one must ponder the extent to which this ascent has already been integrated into the current valuation.”

The upcoming split of GE’s aerospace and energy businesses after the separation of its health arm has caught the eye of investors due to the sectors involved and the name recognition. GE HealthCare Technologies Inc. has returned more than 50% following its debut, outpacing gains for the S&P 500 and a Bloomberg basket of spun-out companies.

That in turn has driven a fear of missing out among investors, who are returning to the stock after shunning it for years, said Morningstar Inc. analyst Joshua Aguilar, who rates the shares as hold. The potential for the two standalone companies has been “baked in,” Aguilar said in an interview, with recent gains pushing the stock into “momentum territory.”

Read more: GE Transformation Makes Former Goliath One of 2024’s Hot Stocks

Among the reasons for why investors have bought the shares ahead of the split, which will see GE retain its aerospace division only, are improvements spearheaded by Culp and a strong interest in owning a standalone aerospace company. Jefferies Financial Group Inc. analyst Sheila Kahyaoglu expects the aerospace company to grow earnings before items such as interest and deductibles to $10 billion in 2028 and values GE Aerospace at $155 per share.

A key factor that makes the transaction special is that both GE units will be ventures with minimal debt, “a rarity in the realm of spinoffs,” said Edge Group’s Osman, who’s been tracking these deals for 18 years.

Companies often spin off heavily indebted, lackluster businesses. That’s not the case for GE Vernova, the power segment, which is expected to begin when-issued trading later this month before regular way trading starts on April 2. As it stands, GE holders will get one GE Vernova share for every four shares of GE they own as part of the split.

As GE’s stock soared, it drove up the consensus 12-month price target among Wall Street analysts. With shares rising to $168.89 on Friday, average analyst estimates see them at about $172 a year from now, data compiled by Bloomberg show. Of the 20 analysts surveyed by Bloomberg, 14 recommend shares to clients. At least three with buy-equivalent ratings have price targets below Friday’s close, however.

For those like Jefferies and Goldman Sachs Group Inc. that have increased their targets following a pair of GE investor days, the argument for investing in GE before the spinoff is complete focuses on revenue growth and execution. Other bullish analysts, including Deutsche Bank AG’s Scott Deuschle, have highlighted GE Aerospace’s plan to buy back $15 billion in stock.