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General Electric (GE) Revamps Portfolio, Shares Increase 7.8%

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General Electric Company (GE - Free Report) yesterday communicated plans to restructure its business portfolio, in a bid to become a high-tech industrial company — focused on Aviation, Power and Renewable Energy. The news lifted market sentiment toward the stock, which rallied 7.8%, ending the trading session at $13.74.

As part of the plan, General Electric has decided to separate GE Healthcare and turn it into a stand-alone company. GE Healthcare — which provides medical imaging and information technologies, patient monitoring systems, and biopharmaceutical manufacturing technologies — has generated roughly $19 billion revenues in 2017 while recorded an impressive 9% growth in segmental profit.

The company plans to sell 20% interest in GE Healthcare while intends on distributing 80% stake to shareholders in a tax-free manner. The spin-off will likely be completed in the coming 12-18 months. It is worth mentioning here that the current president and CEO of GE Healthcare, Kieran Murphy, will continue to head the business, post the spin-off.

In addition, General Electric intends to dispose of its 62.5% interest stake in Baker Hughes, a GE company (BHGE - Free Report) . This Texas-based oilfield service provider was formed in last July when General Electric merged its oil and gas services, and equipment business with the acquired assets of Baker Hughes Inc. The stake disposition, to be carried out in the next two to three years, is going to mark the exit of the company from oil and gas businesses.

As a reminder, in May 2018, General Electric signed an agreement to combine GE Transportation with Wabtec Corporation. In lieu of its transportation business, the company will receive $2.9 billion in cash at the time of the closing of the transaction (anticipated in early 2019) while its shareholders will gain 50.1% ownership interest in the combined company.

Also, General Electric reiterated its intention of shrinking GE Capital business, aiming $25-billion sales in finance assets (energy and industrial) by 2020 and assuming capital contribution of $3 billion in 2019. Moreover, it is working on lowering its exposure to the insurance business.

With all these restructuring initiatives, along with other deals like the divestment of Distributed Power business to Advent International a couple of days ago and the disposition of Value-Based Care business by GE Healthcare to Veritas Capital in April this year, the company seems to have achieved its $20-billion assets-divestment target.

Benefits From Restructuring Actions

All of the above-mentioned restructuring moves will make General Electric a more focused player in the aviation, power and renewable energy industry. Its technological expertise, as well as solid product offerings and innovation-investments, will strengthen its businesses.

The company anticipates realizing corporate savings of more than $500 million by 2020, resulting from the implementation of the new GE Operating System. It intends to maintain its quarterly dividend until the completion of GE Healthcare separation while it might consider some revision post the completion.

Moreover, for its Industrial business, the company intends on reducing debt by $25 billion by 2020, net debt-to-EBITDA ratio of less than 2.5, long-term credit rating of ‘A’ and cash balance of $15 billion.

General Electric currently has a market capitalization of $119.4 billion. This conglomerate’s share price has yielded 0.4% return in the past three months, as against 1% decrease recorded by the industry.

Stocks to Consider

Some stocks worth considering in the industry are Federal Signal Corporation (FSS - Free Report) and Honeywell International Inc. (HON - Free Report) . Both the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the last 60 days, earnings estimates for these two stocks have improved for the current year. Also, average earnings surprise for the last four quarters was a positive 16.07% for Federal Signal and 1.49% for Honeywell International.

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