General Electric (GE 2.20%) is shrinking — and for investors, that’s a good thing.
Shares of the onetime industrial giant jumped 2.1% through noon ET on Monday after GE confirmed its plans to spin off its GE HealthCare division as an independent company this morning, announcing the composition of the new company’s board of directors and setting a target date of the “first week of January 2023” for the spinoff.
GE named 10 executives to sit on the board of the newly independent GE HealthCare, starting with the division’s current president and CEO Peter Arduini and including Larry Culp (GE’s current chairman and CEO) as well. Other members hail from academia, from hospital networks, accounting firms, and even tech company HP.
The company confirmed that the spinoff will be tax-free for shareholders.
That’s the good news for investors. The bad news is that GE didn’t change its prediction, revealed in July, that operating earnings at GE HealthCare remain under pressure this year and are likely to come in below early-year estimates at “approximately $3 billion.”
Still, that works out to a very respectable 16.9% profit margin on the business, which generated $17.7 billion in revenue last year, growing in the midsingle digits. Moreover, GE believes that as the economy stabilizes and regular healthcare consumption normalizes again in the wake of COVID-19, profit margins could grow into the 20% range in 2023 and beyond — implying earnings growth far in excess of sales growth at perhaps 18%.
As for whether that growth rate makes GE HealthCare a “bargain” stock…well, we’ll have to wait until January and see what the market cap looks like post-spinoff to figure that one out.