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Stock Analyst Update

GE Does an About-Face on Digital

We are maintaining our fair value estimate as well as our very high uncertainty rating as the narrow-moat firm creates a new digital entity.

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Narrow-moat-rated  General Electric (GE) announced plans to create a new independent entity that will consist primarily of its digital industrial Internet of Things offerings. These assets include its Predix platform, some remaining automation assets, and some other software solutions. The new digital entity will have a separate brand and identity, board of directors, and equity structure, but it will be wholly owned by GE. GE Digital CEO Bill Ruh will depart the company, and GE is conducting a search for a successor. GE also announced an agreement to sell substantial portions of ServiceMax to private equity firm Silver Lake. ServiceMax provides field service management software. Terms of the deal were undisclosed, but GE will retain a 10% stake in ServiceMax. GE shares have risen 10% in premarket trading unrelated to the announcement. However, while we may make minor adjustments in our model, we are maintaining our $13.70 fair value estimate as well as our very high uncertainty rating.

The new company will have approximately $1.2 billion in revenue, but we are reasonably certain it will remain unprofitable for the foreseeable future. As part of the June 26 announcement regarding the intended separations of Healthcare and Baker Hughes, former CEO John Flannery said the cash drag on GE was a "significant negative number." Previously, the firm targeted no net cash drag from digital spending by 2020. Longtime followers of the company will recall that substantial portions of GE’s 2015 investor day were dedicated to Predix, which was then-CEO Jeff Immelt’s initiative to push GE into more technology-oriented offerings. San Ramon-based GE Digital, however, continued to struggle in the ensuing years.

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Joshua Aguilar does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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