Last week, the Wall Street Journal reported that General Electric’s (GE) was planning to spin off its unit which offers store-branded credit cards to consumers. JPMorgan’s C. Stephen Tusa and Drew Pierson explain why they remain unthrilled by GE’s prospects:
Dhiraj Singh/Bloomberg News …press reports suggest that plans for a potential IPO of PLCC are moving forward but we still don't see portfolio actions as a "silver bullet" to the sum-of-the-parts, and the fact that smaller spins/sales are still being considered highlights the challenge of driving a clean exit of a business this large (though keep in mind that there remains a range of options outside an IPO). For the stock, shares have lagged since the 2Q earnings relief rally (-6% versus group -2%, S&P -3%), which increases the chances of another "not as bad as feared" rally later this year, but we don't see enough incremental good news on either Industrial fundamentals or GECS portfolio actions to change our relatively more cautious stance near term – we remain Neutral.
Barclays’ Scott Davis and Michael Stein are far more optimistic. They write:
We have long argued that GE Capital (and PLCC in particular) were under-valued assets in the GE portfolio and would be better served under different ownership. PLCC stand-alone could be an intriguing asset for the right set of investors and timing of exit appears to be a win/win. Additionally, as GECC earnings become a much smaller piece of the pie, GE stock can reasonably fall into the asset class bucket of late-cycle industrials still at market troughs in key businesses – in this scenario, we could see the market move away from a sum-of-the-parts view of GE and toward an all-in multiple, in line with multi-industry peers…
GE has gained 9.5% this year after falling 0.7% to $22.98 today, well behind the SPDR S&P 500 ETF’s (SPY) 15% gain and the Industrial Select Sector SPDR’s (XLI) 17% rise. United Technologies (UTX) has risen 25% this year, while 3M (MMM) has advanced 22%.
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