GE Stock Sell-Off on Reverse Stock Split News
We are maintaining our fair value estimate as the split bears no bearing on the intrinsic value.
After attending GE’s (GE) virtual outlook meeting and reviewing its announced GECAS transaction, we maintain our fair value estimate of $14.10. The market sold off GE’s stock by over 5% on the trading day, which we speculate is due to the announcement that its board recommended a 1-for-8 reverse stock split to decrease the number of shares outstanding (to take place sometime prior to the annual meeting in early May of 2021). To be clear, a reverse stock split bears absolutely no bearing on the intrinsic value of a firm. We surmise that part of the motivation is removing some of the perception of owning what’s been a sub-$10 stock at various points in time as this can form a bar to institutional ownership. We also believe a higher stock price could encourage longer-term ownership.
At a high level, we think the GECAS deal is slightly less accretive to our fair value estimate than we originally thought when we ran some preliminary figures in the background as this deal contains less transferred liabilities than we expected ($4 billion of non-debt liabilities), but with 46% equity in the combined AerCap-GECAS entity. As we currently model the deal, there’s minor fair value accretion (less than a dime per share versus the 40 to 50 cents per share we speculated previously), but this accretion was offset by other operating puts and takes. While we somewhat agree with management that the deal creates financial value, as it stands, we think most of the potential value creation comes from an aerospace recovery in the combined leasing entity. We also surmise we’re baking in additional contingent liabilities in our assumptions at what remains of GE Capital relative to GE’s internal projections.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Joshua Aguilar does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.