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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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GE Spinoff Offers Investors Interesting Strategy During Volatile Market

It is hard being an investor these days. Market volatility is intense. Oil prices remain weak and despite predictions of the fall actually helping to boost the economy, stocks are falling in line with prices. And despite the market’s overall coming back a bit this week, the Dow, S&P, and Nasdaq are all still down substantially compared to where they were earlier this year. It’s little wonder then that many investors seem a little jaded and are skeptical of corporate efforts to boost shareholder value. A recent announcement by industrial titan General Electric did bring one very promising announcement that even the most jaded of investor should read with rapt attention.

The stock prices of spinoff companies on average outperform the remaining parent company over time. GE’s recent announcement that they are creating a portfolio of business lines to go in a new corporate entity fits perfectly with that stylized fact about spin-offs. General Electric has been building a strong presence in a lot of new technology areas from LED lighting to energy storage to solar power components. The firm intends to put all of these business lines under a new entity to be called Current. That firm is likely to start with around $1 billion in revenue but those revenues should grow to $5 billion by 2020. Related: Bearish Signals Quickly Kill Off Oil Price Rally

GE is clearly setting Current up to be a growth investment vehicle. General Electric is a massive competitor in just about every industrial area on the planet, so removing these business lines won’t impact GE much, but they will give investors looking for rapid sales growth the ability to invest in a company that is intricately linked to the industrial side of just about every new energy technology out there. It’s likely that Current’s stock will be massively popular with both retail and institutional investors and that it will command a very healthy premium multiple initially. Of course, whether or not Current can keep that premium is another matter. There have been many companies with rapid initial revenue growth that subsequently let investors down only to see their stocks crater thereafter. KORS and WDAY come to mind to name two. Related: VW’s Dieselgate Scandal Could Cost Up To $87 Billion In Total

Yet if Current can develop an achievable long term growth profile that investors are comfortable with, the company could quickly become one of the most interesting names in the green energy space. We don’t yet have details on the specific financials for the business lines that will go into Current, but margins could be 20 percent or more in many cases. Using a 20X multiple and assuming GE’s projected $5 billion in revenue for 2020 is fair, a 20 percent margin for Current overall would make it a $20 billion firm. Even a 30-40X multiple is conceivable given the right business lines (look at EMC’s VMW subsidiary for instance), so Current could well become a major stock in its own right in a few years under the right management and conditions.

One GE Employee, Beth Comstock, was recently quoted discussing the spinoff and noting that Current’s product areas will include “solar power, energy storage systems, EV charging equipment, intelligent LED lighting and software to manage it all.” Comstock is a savvy business woman who was recently made Vice Chair at the company and helped with the founding of Hulu. Given that past success with Hulu, it’s definitely worth keeping an eye on GE as it makes future announcements about Current. Related: Is The Oil And Gas Fire Sale About To Start?

Current will be competing with the likes of Tesla, Cree, SolarCity, and many other market darlings, but few of these firms have the breadth of businesses that Current will. That diversification should help Current endure turmoil in any of its end markets in the future, and it could also make the new firm an attractive acquisition target.

One possible suitor could be Johnson Controls. JCI has a diverse line of businesses already which would make it easier to integrate Current, and JCI has a major presence in the commercial energy efficiency markets through its climate control systems. Current could be appealing to JCI in that it would instantly make the firm a growth stock again while also offering attractive synergies and in-roads into new markets.

Given all the potential Current has, this is one spinoff that investors should definitely keep their eyes focused on.

By Michael McDonald of Oilprice.com

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