Wall Street analysts are cheering General Electric’s move to start splitting itself up after poor shareholder returns in the past year.
On Monday the industrial conglomerate announced a deal to merge its transportation business with Wabtec in a transaction valued at $11.1 billion. General Electric will receive $2.9 billion in cash at the merger’s close. GE and its shareholders will also get 50.1 percent ownership of the combined company.
Shares of GE rose 3 percent Monday after the announcement to a three-month high. The stock pared some of those gains and closed up 1.9 percent.
“This deal is the largest cornerstone for [GE CEO] John Flannery’s plan to divest non-core assets,” William Blair analyst Nick Heymann said in a phone interview. “If this stock starts to move higher people will worry about missing the upside because it is in the index.”
Luke Sharrett | Bloomberg | Getty Images General Electric Evolution Series Tier 4 diesel locomotives stand on the final assembly line at the GE Manufacturing Solutions facility in Fort Worth, Texas, Oct. 25, 2016.
Heymann has an outperform rating for GE’s stock. He doesn’t have an official price target for the company. But the analyst said GE shares can rise to the $20 to $22 range in the next 12 months if the company generates $10 billion of annual free cash flow or $1.15 of FCF per share.
GE is a “free cash flow story,” he said. “GE is no longer a contrarian stock. It’s a value stock.”
Other Wall Street analysts praised the deal’s valuation and its prospect of further economic upside for General Electric.
“The GE Transportation exit (to be merged with Wabtec) appears accretive and is a strategic plus for GE,” Cowen analyst Gautam Khanna said in a note to clients Monday.
One analyst said the up-front cash payment will benefit the company’s balance sheet.
“The removal of this capital-intensive and secularly-challenged business is still a net positive overall for GE’s portfolio transformation, in our view,” RBC Capital Markets analyst Deane Dray wrote in a note to clients Monday. “We note that the $2.9 billion cash infusion helps give GE some welcomed cushion for its liquidity needs.”
The transportation business divestment is Flannery’s biggest strategic move since he took the top leadership role at GE last summer.
Earlier this year Flannery implied the company was considering a breakup on a call with investors.
“We are looking aggressively at the best structure or structures for our portfolio to maximize the potential of our businesses,” Flannery said in January.
GE’s stock is down about 45 percent in the past 12 months through midday Monday versus the S&P 500’s nearly 15 percent return.