On May 9, 2023, Jacobs Solutions Inc. (NYSE: J) announced its intention to conduct a tax-free spin-off its Critical Mission Solutions (CMS) business into an independent, standalone, publicly traded company, subject to customary closing conditions including, among others, the receipt of a private letter ruling from the Internal Revenue Service (IRS), an effectiveness declaration of a Form 10 filing by the Securities & Exchange Commission (SEC) and final approval by J’s Board of Directors.  Subsequently, on November 20, 2023, Jacobs announced a definitive agreement to spin off CMS (along with the Cyber & Intelligence portion of its Divergent Solutions business) and merge it with privately held Amentum in a tax-free, Reverse Morris Trust (RMT). 

The combined CMS, C&I and Amentum (CombineCo) business generated ~$13.7 billion of annual sales (& ~$1.1 billion of adj. EBITDA, including $50-$70 million of synergies) for the last twelve months, and “create a leading provider of system integration & technology solutions” and “deliver expertise in the government’s highest priority areas of energy, space exploration, intelligence & analytics, and digital modernization”, at scale.  On the flip side, management indicated that the post-separation parent (RemainCo) will be a “higher value” company focused on “technology-enabled solutions” for the “world’s most complex critical infrastructure & sustainability challenges” with “leading positions in the attractive water and environment, energy transition, transportation and advanced manufacturing sectors” with ~$11.4 billion in trailing annual sales. 

Post-spin parent, Jacobs, and its shareholders were expected to own 58.5%-63% of the combined spin entity, Amentum, consisting of 51%-55% for J shareholders and the parent’s retainment of 7.5%-8.0%. (Funds managed by American Securities and Lindsay Goldberg, the current owners of Amentum, will own 37%-41% of the combined post-spin company). The final ownership stakes will be determined based on reaching certain operating targets at CMS and C&I. Further, RemainCo will receive a ~$1 billion cash dividend, which is expected to primarily be directed toward debt repayment (in an effort to maintain an investment grade credit rating).  All told, CombineCo is targeting a leverage ratio of ~4x at closing (with the goal of reducing that metric to below 3.0x, including synergies, within 24 months).

The company filed its initial Form 10 in late-July (16^th), held a capital market day for Amentum on August 13, 2024 and expects to complete the transaction toward the second-half of its September-ending F2024.  More recent commentary indicates the separation will be completed in the latter half of September 2024 (as the company has cleared all regulatory approvals for the transaction, save the private letter ruling from the IRS).

John Heller, the current chief executive of Amentum will serve as the combined company’s CEO (as well have a seat on the Board), while Dr. Steve Arnette, the current president of CMS, will serve as CombineCo’s chief operating officer (COO).  Steve Demetriou, J’s current Executive Chairman, and former CEO from 2015 until 2023, will assume the same role at Amentum.  Mr. Robert (Bob) Pragada, J’s chief executive from early-2023, will remain the CEO of the parent (and will assume the role of Board Chairman).

Our valuation analysis indicates that J’s current pre-spin stock price roughly aligns with our estimate of its fair value, suggesting limited immediate upside. However, depending on post-spin-off trading activity, there may be compelling opportunities for both the parent company and the spin-off entity. We have detailed price targets and further analysis in the report.

Luxfer Holdings (NYSE: LXFR) reports three business segments: (1) Gas Cylinders (~46% of consolidated sales & ~38.5% of adj. EBITDA in 2023), which is a leading provider of specialized carbon composite (as well as aluminum) cylinders for gas storage & transportation; (2) Elektron (46% of sales & ~61.5% of adj. EBITDA), which primarily focuses on magnesium & zirconium-based advanced materials for, among others, the aerospace, healthcare & defense sectors; and (3) Graphics Arts (8% of 2023 consolidated sales), which offers magnesium, copper, zinc & brass photoengraving plates for the graphic arts and luxury packaging arenas. In October 2023, LXFR announced a wide-ranging strategic review, which precipitated the decision, in February 2024, to pursue a sale of its non-core (and poorly performing) Graphic Arts business, which is expected to be completed by year-end, as well as the acknowledgement that the remaining Gas Cylinders & Elektron businesses had no “material strategic synergies” and could ultimately be separated in management’s pursuit of unlocking value for shareholders. In that context, we think LXFR shares are undervalued relative to the sum value of its parts; to that end, in our estimation, based on management guidance and commentary as well as peer and M&A valuations, LXFR’s Gas Cylinders, Elektron, and Graphic Arts businesses could be valued at ~$8 per share, ~$10 per share, and ~$0.50 per share, respectively. Accounting for projected net debt of ~$2 per share yields a base case sum-of-the-parts fair value of $16.50 per share (with bull and bear cases of ~$19 per share and ~$14 per share, respectively). Potential catalysts include the separation/monetization of LXFR’s various businesses, accretive M&A, share repurchases, leverage reductions and/or better than expected growth and margins, particularly at the Gas Cylinders and Electron segments. Risks include management execution, including on acquisition integration, accident liability, currency fluctuations, competition/pricing pressure, leverage, regulation, labor issues, raw material availability, cyberattacks, geopolitical disruptions, including a pandemic, and/or a deterioration in industry fundamentals due to, among other things, a recession.

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On October 5, 2023, Howard Hughes Holdings Inc. (NYSE: HHH) issued a press release detailing the creation of a newly formed division, Seaport Entertainment, which now controls the company’s entertainment-related assets in New York and Las Vegas. Assets in the new division include the Seaport in Lower Manhattan and the Las Vegas Aviators Triple-A Minor League Baseball team (as well as the team’s stadium). Additionally, the 25% ownership stake in Jean-Georges Restaurants and the 80% air rights ownership above the Las Vegas Fashion Show Mall, which are contemplated to be used to create a new Las Vegas Strip casino, are included in Seaport Entertainment. HHH intends to complete the spin-off of Seaport Entertainment into a publicly traded company by year-end 2024. Following the planned separation, HHH will transform into “a pure-play real estate company focused solely on its portfolio of acclaimed master planned communities.”

In 2019, HHH announced a “Transformation Plan” that would be focused on three pillars: a reduction in annual overhead expenses, the sale of non-core assets, and accelerated growth in the core MPC assets. As of today, HHH describes itself as owners of “one of the nation’s largest portfolios of master planned communities (MPCs), as well as operating properties, strategic developments, and other unique assets across six states from New York to Hawai’i.”

The company now operates under four segments: Operating Assets, MPCs, Strategic Developments, and Seaport. Outside of the Seaport segment, the company operates a value creation cycle through the remaining business segments, whereby MPC plans, develops, and manages “small cities and large-scale, mixed-use communities”, with acreage being sold to home developers. Strategic Developments builds commercial properties using cash flow from MPC land sales, which are then transferred into the Operating Assets segment, ultimately generating Net Operating Income (NOI), which is then used to fund new Strategic Developments.

In approaching valuation, we acknowledge that the majority of value in both the parent company and post spin Seaport Entertainment is largely derived from the future value of land and earnings potential from operating assets versus HHH’s current earnings profile. As noted in management’s estimated NAV, the largest ascribed value is placed on future MPC land sales, some of which are forecasted to last into 2086, which requires a high degree of assumptions to be made, all of which are subject to challenge and the ultimate reliability of such is highly uncertain aside from the fact that these assets have some value.

In deriving our fair value estimate, we attempt to approach our assumptions in a conservative manner while acknowledging there is upside potential and noting that the ultimate value realization to shareholders may not be realized for several years, if not decades. Within that mindset, the volatility surrounding asset valuations due to economic and social forces may diminish the ultimate long-term returns. Further, given the asset-heavy valuation approach, it is not clear if the separation of the Seaport assets in of itself will prove to be a value-creating transaction. Instead, we suggest that ex-Seaport Entertainment, the parent company appears to better positioned to capitalize on its value creation cycle and should at least appear more attractive to investors. As for Seaport, low occupancy, negative cash flow, and the need to fund the 250 Water Street project will likely remain a concern for those outside of deep value real estate-focused investors.

On a pre-spin, sum-of-the-parts basis we assign an $80 fair value estimate to shares of HHH, consisting of $70 in value from the parent company and $8 per share in value from Seaport Entertainment. With over 20% upside to our base case fair value estimate we recommend shares of Howard Huges prior to the separation. Upside to our fair value estimate exists from improvements in the general economy, which would result in increasing leased percentages and occupancy, increased land values at the MPCs, and progress made on profitability at Seaport. We again note that it is not our belief that in and of itself, the spin transaction will unlock value. However, the parent company is better positioned to capitalize on its value creation cycle, and ultimate shareholder returns may take several years.

On November 23, 2023, MDU Resources Group Inc. (NYSE: MDU) announced that its Board of Directors approved a plan to separate the construction services business into a standalone, publicly traded company, via a spin-off. Following the separation, MDU Resources will become a pure-play regulated energy delivery company. The transaction, which is targeted to be completed in late-2024, is subject to customary closing conditions, including an effectiveness declaration of a Form 10 filing with the SEC, final Board approval, and receipt of opinions or rulings as to the tax-free nature of the transaction, amongst others. In March 2024, MDU announced that it had confidentially filed an initial Form 10 with the SEC, and reiterated its intention to complete the separation in late-2024. In the prior Knife River separation, MDU retained an approximate 10% stake in the new company, which was disposed of in a tax-free exchange in November 2023. The standalone Construction services company will adopt the corporate moniker Everus Construction Group. MDU management has not ruled out retaining an ownership stake in Everus similar to what was done with the Knife River transaction.

The final deconstruction of MDU returns the company to its roots as a pure play energy delivery and distribution company with significant scale. It plans to invest $2.7 billion into regulated infrastructure over the next five years that will deliver earnings growth. As a utility, the company should be able to generate stable cash flow, and earnings growth from system replacement and expansion, particularly in relation to the electric transmission system. Tailwinds from government infrastructure spending and new high-volume electric customers, such as data centers, combined with approximately 80% of utility revenue being fixed augers well for stable earnings and cash flow growth at the post-spin MDU. Management has stated that MDU will maintain its long-term dividend payout policy of 60% to 70% of regulated earnings, and has indicated that there are no foreseeable equity issuance needs prior to 2027.

For its part, the Construction Services business is positioned to capitalize on government infrastructure spending and deliver earnings growth at or above that of the utility business. For reference, the current segment has grown EBITDA at a 17% CAGR since 2018, while requiring minimal capital expenses (<2% of revenue) allowing for business reinvestment and potential acquisitions. Notably, the segment has a current backlog (as of the March 2024) of $2.2 billion, of which $1.85 billion is related to electrical and mechanical work.

Given the current trading multiple of MDU, it implies that following the spin-off, shares of Everus should be re-rated higher to approximate that of E&C peers, while a corresponding reduction in trading multiples at the utility company does not seem likely. Under this scenario, the transaction appears to be poised to unlock value when considering the growth prospects for both post-spin companies.

We fairly value MDU at $31 per share, consisting of approximately $16 per share in value from Everus and $15 per share from the remaining regulated businesses. Given the implied upside to our fair value from the current share price, we rate pre-spin shares of MDU at BUY. We note that both post-spin companies’ ability to grow earnings are supported by macro trends, including large government spending from the Infrastructure Investment and Jobs Act, and the Inflation Reduction Act, customer and rate base growth from regulatory friendly jurisdictions, which provide an attractive investment opportunity at the current pre-spin share price.

TFI International Inc. (NYSE: TFII) reports four business segments: (1) Package & Courier (~7.5% of consolidated sales and ~11% of adjusted EBITDA in 2023); (2) Less-than-Truckload (44.5% of sales and ~38% of adj. EBITDA); (3) Truckload (25.5% of 2023 sales and 34.5% of adj. EBITDA); and (4) Logistics (22.5% of sales and 16.5% of adj. EBITDA in 2023). In our view, following the April 2024 acquisition of specialized/flat-bed carrier Daseke, Inc., TFI International, which has an active history of both acquisitions & divestitures (and was previously covered by The Hidden Opportunities Report in 2017-2021), is incrementally likely, based on recent management commentary, to consider potential value-unlocking options for its Truckload division, including a spin-off as a standalone or a strategic merger (looking into 2025-2026).

Additionally, the company’s asset-light Package & Courier (P&C) business (as well as the non-asset-based Logistics division) are seemingly undervalued in the current corporate structure and could be ancillary sources of longer-term optionality. On the valuation front, TFII trades at less than 8.0x 2025E EV/EBITDA, ~14.5x 2025E EPS, and, at the mid-point of management’s recently articulated guidance, with a free cash flow yield of ~8%. (Additionally, we would highlight that at the current quote TFII is within the $125-$135 per share range that management has recently indicated it was willing to accelerate its stock repurchase activity.)

Based on management guidance and commentary as well as peer and M&A valuations, TFII’s Package & Courier (P&C), Less-than-Truckload (LTL), Truckload (TL) and Logistics businesses could be valued at $10 per share, ~$83 per share, $53 per share, and ~$49 per share, respectively. Accounting for corporate costs and projected net debt of ~$27.50 per share yields a base case sum-of-the-parts fair value of $167.50 per share (with bull and bear cases of ~$186.50 per share and ~$148.50 per share, respectively). Potential catalysts include the separation/monetization of TFII’s businesses, accretive M&A, share repurchases, leverage reductions and/or better than expected growth and margins, particularly at the LTL & TL segments. Risks include management execution, particularly on acquisition integration, accident liability, currency fluctuations, competition/pricing pressure, regulation, labor issues, geopolitical disruptions, including pandemics, and/or a deterioration in industry fundamentals due to a recession.

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In January 2023, Baxter International Inc. (NYSE: BAX) announced that it would spin-off its Kidney Care business into a standalone publicly traded company, implement a new operational model to improve manufacturing and supply chain integration and better represent business activities, and would pursue strategic alternatives for the BioPharma Solutions (BPS) business. The BPS business was sold in September 2023, for which the company received cash proceeds of $3.96 billion. In 4Q 2023, the company used approximately $2.8 billion of said proceeds to retire debt and expects to use the remainder to retire near-term bonds that are coming due. The company has a targeted net leverage ratio of 2.75x in 2025.

In March 2024, BAX filed a Form 8-K with the SEC in which the company disclosed that “it has been in recent discussions with select private equity investors to explore a potential sale of the Kidney Care asset in lieu of the proposed spin-off of the business.” While no final decision has been made on the ultimate form of the Kidney Care separation, management stated it is committed to “separating“ the business in 2H 2024. The standalone business, if spun off, is expected to adopt the corporate moniker Vantive.

As the company stands today, it describes itself as providing “a broad portfolio of essential healthcare products, including: acute and chronic dialysis therapies; sterile intravenous (IV) solutions; infusion systems and devices; parenteral nutrition therapies; inhaled anesthetics; generic injectable pharmaceuticals; surgical hemostat and sealant products, advanced surgical equipment; smart bed systems; patient monitoring and diagnostic technologies; and respiratory health devices.” In 2023, the company generated $14.8 billion in revenue and operated with a 14.7% operating margin.

From a separation perspective, the rationale appears to make sense in the fact that the removal of the lower-margin Kidney Care business will significantly improve overall profitability measures for the parent company, Baxter. It should be noted that while management is targeting 4% – 5% topline growth, it has emphasized that the company is focused on improving overall profitability and is willing to see slower growth in the near term. Absent Kidney Care segment contributions, consolidated margins would have widened by 310 basis points each year, on average.

As a point of reference, BAX currently trades at 8.7x and 11.3x its consensus 2024 EBITDA and EPS estimates, respectively. In relation to its discounted multiple to the medical device and supplies peer set, it should be noted that BAX as a whole operates with an EBITDA margin that is roughly 800 basis points below that of the low-end performing peers and roughly in line with that of the Kidney Co. peer. Absent Kidney Co., BAX’s margins should expand, so as to narrow the margin discrepancy, although still remaining below its peers.

Valuing the post-spin companies at 9.0x for Vantive, roughly in line with the current BAX multiple, and 12.0x for post-spin Baxter equates to respective fair enterprise values of $5.2 billion and $28.0 billion. Based on current net debt and shares outstanding, we assign a pre-spin sum-of-the-parts fair value estimate of $43 per share. Given the implied upside from the current share price nearing 20% we rate pre-spin shares of Baxter International at BUY.

The recent pullback in shares may present a buying opportunity for a business in the midst of a turnaround, with the planned separation providing a near-term catalyst. Further, if the company were able to attract a private equity buyer for the Kidney Care business, it may provide further upside to our valuation. Our analysis of recent medical device and supply companies suggests that while M&A has been completed within a wide valuations range, the low end appears to be near 12x forward EBITDA estimates. If Vantive were to be valued at 12x our 2025 EBITDA figure, our fair value estimate would increase by $4 per share.

On February 8, 2024, A.P. Moller-Maersk (MAERSKA DC, MAERSKB DC) announced the intention to spin off its Towage business, Svitzer, into a standalone, publicly traded company. A.P. Moller-Maersk (“Maersk”) shareholders of record as of May 1, 2024, will receive two shares of Svitzer for each share of Maersk. Shares of Maersk will trade without the right to the spin-off starting April 30, 2024, which is also the first day of trading for Svitzer under the ticker SVITZR DC. Maersk will hold a special meeting on April 26, 2024, to formally approve the separation.

The spin-off of Svitzer could present a compelling investment opportunity for those able to invest in small cap equities. It is reasonable to believe that few of Maersk’s institutional investors will be allowed to own the significantly smaller Svitzer, especially if they have a large capitalization mandate or reference any of the 130 indices that currently include the parent company. Any such selling pressure would allow investors to purchase a well-managed, market-leading, stable business at a discount.

Svitzer is expecting to reduce capital expenditures in 2024 after two years of steadily increasing investment in growth projects. Lower capex, combined with modest growth expectations, point to estimated 2024 free cash flow of DKK700 million, which is 3x higher than what this business generated last year. This potential cash generation may not be fully appreciated by the market at the time Svitzer begins trading.

Going forward, secular industry trends point to steady revenue growth in the low-single digits, while Svitzer stands to leverage its leading market position to expand organically into new markets. In addition, the company has an easy means of creating equity value by simply using its free cash flow to pay down borrowings.

The parent company’s valuation is not expected to be impacted materially by the demerger of Svitzer. This is not a commentary on Maersk’s investment merits, simply that the reasons to own or not to own Maersk have little to do with the spin-off of the towage business.

TriMas Corporation (NASDAQ: TRS) reports three business segments: (1) Packaging (52% of consolidated sales and ~57% of adjusted EBITDA in 2023); (2) Aerospace (27% of sales and ~21% of adjusted EBITDA); and (3) Specialty Products (21% of 2023 sales and 22% of adjusted EBITDA). TRS, which has an active history of both acquisitions and divestitures, including, most recently, the spin-off of its automotive business, Cequent (renamed Horizon Global) in June 2015 as well as the sale of Lamons, a gasket & bolt provider to the energy complex, in December 2019, is considering the sale of its energy-focused Arrow Engine business (currently housed within the Specialty Products segment along with the Norris Cylinder business), in part, under recent pressure from activist investor, Barington Capital (an ~1.1% holder). That said, we think the company could consider additional portfolio changes to increase its focus on the core Packaging sector, which we think would help alleviate any conglomerate discount as well as improve longer-term operational performance with respect to growth, margins and capital allocation (while also allowing investors to better target their investment dollars). To that end, while we view the company’s Aerospace business as well-positioned, we think it could likely benefit from increased scale as part of a larger enterprise (within a growing as well as consolidating industry). Moreover, we think TRS’s share price performance, which has materially lagged both the S&P 500 and Russell 2000 indexes over the last one-, three- and five-year periods, weakens management’s potential rationale for the maintenance of the current operating structure.

Based on management guidance and commentary as well as peer and M&A valuations, TRS’s Packaging, Aerospace, and Specialty Products businesses could be valued at $26 per share, $14 per share, and ~$8.50 per share, respectively. Accounting for corporate costs and projected net debt of ~$14.50 per share yields a base case sum-of-the-parts fair value of $34 per share (with bull and bear cases of ~$38 and ~$29 per share, respectively).Potential catalysts include the separation/monetization of any of TRS’s diverse businesses, accretive M&A, share repurchases, leverage reductions and/or better than expected growth and margins, particularly at the Packaging segment. Risks include management execution, shifts in technology or consumer preferences, competition, commodity and currency fluctuations, regulation, geopolitical disruptions, including pandemics, and/or a recession.

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On July 26, 2022, 3M Co. (NYSE: MMM) announced plans to separate its health care business into a standalone, publicly traded company via a tax-free spin-off. The completion of the spin-off is subject to customary closing conditions such as final Board approval, an effectiveness declaration of the company’s Form 10 filing by the SEC, and receipt of a private letter ruling from the IRS regarding the tax-free status of the separation. The spin company will adopt the corporate moniker Solventum following the separation.

The company is “targeting” an April 1, 2024, separation date. MMM will retain a 19.9% ownership stake in Solventum, which it expects to divest fully by the end of a five-year period. In conjunction with the separation, Solventum is expected to incur $8.38 billion in debt, of which $7.7 billion of the proceeds will be distributed to MMM. Following the separation, Solventum will be levered at approximately 3.5x on a net debt-to-EBITDA basis. (Pro-forma cash balance as of December 31, 2023, totaled $600 million.)

Following the separation, Solventum will be “a leading global healthcare company developing, manufacturing, and commercializing a broad portfolio of solutions that leverages deep material science, data science, and digital capabilities to address critical customer and patient needs.” Solventum, as a standalone company looks to capitalize on an aging population, the healthcare industry’s investment in optimizing productivity, a shift to digital and data-driven care delivery, a change in care sites out of hospitals, and personalized care. Notably, as a standalone company, Solventum will largely be indemnified from the legal liabilities that continue to plague the current MMM (related to drinking water and ear protection claims). Absent that overhang, it could be posited that shares would trade more in line with medical technology peers, which currently trade at a premium to 3M’s multiple.

As for post-spin 3M, the company will continue to address its legal overhangs. Given the current status of settlements, 3M’s spinning off Solventum and retaining a 19.9% ownership stake significantly improve the company’s ability to satisfy obligations related to PFAS (per- and polyfluoroalkyl substance) and CAE (Combat Arms Earplugs).

On a pre-spin, sum of the parts basis, we fairly value shares of MMM at $110 per share, consisting of $38 per share in value from Solventum and $72 per share in value from the remaining parent company businesses. On a post-spin basis, we value shares of Solventum at $30 per share (accounting for the 19.9% ownership stake retained by MMM), and $80 per share for post-spin MMM, which includes its ownership stake in Solventum. Shares of MMM have significantly underperformed the broader market (measured on a total return basis versus the S&P 500 index and the S&P 500 Industrials index) over the prior one- (-10.4% vs. +28.5% and 20.2%, respectively), three- (-41.1% vs. +39.6% and 37.3%), and five-year (-43.6% vs. +100.8% and +79.0%) periods. As noted in this report the legal liability overhang has most certainly been a factor in this underperformance. However, following the separation, Solventum should be largely insulated from this, and as a standalone healthcare company should attract a more focused investor base, which supports our re-rating thesis. As for the parent company, an improved balance sheet may lessen concerns over the company’s ability to fund the legal liabilities, and at a minimum maintain a valuation multiple similar to its current depressed levels versus peers.

Shares of MMM sold off 11% on the day following 4Q 2023 results (late January 2024), largely on soft end market commentary included in the company’s guidance. Year-to-date, the shares have declined by 15.3% as the S&P 500 index has increased by 7%. It is our opinion that, at the current share price levels and valuation, the soft guidance and known legal liabilities are largely priced in. Further, we do not view the price of MMM shares as fully reflecting the healthcare spin-off re-rating potential that we expect to occur following the separation. Under this framework, combined with our fair value estimate representing almost 20% upside from the current share price, we view shares as presenting an attractive risk reward scenario heading into the separation. Thusly, we rate MMM at BUY ahead of the planned April spin-off of Solventum. While we acknowledge the contrarian nature of this investment view (based on the consensus traditional Wall Street published opinions), we note that it is largely based on an improved balance sheet at the parent to fund legal liabilities and a re-rating of the spin-company to a higher valuation multiple as opposed to being derived from a significant uptick in operational improvement/end market fundamentals, both of which may provide optionality. Investors may wish to revisit General Electric’s January 2023 spin-off of its health care business to illustrate our thinking on a re-rating scenario of a healthcare focused company coming out of a more generalized industrial entity.

The company generated $64.5 billion in revenue and $6.1 billion in segment operating income in 2023 and operates under three reportable segments: Power (27.5% of revenue in 2023, with operating margins of 8.2%); Aerospace (formerly referred to as Aviation) (49.2% of revenue in 2023, with operating margins of 19.2%); and Renewable Energy (23.3% of revenue in 2023, with operating margins of -9.5%).

Management expects to complete the spin-off of the Power and Renewable businesses into a single standalone publicly traded company in early 2Q 2024, named GE Vernova. As a combined entity, GE Vernova would have generated $29.2 billion in revenue and operated with a modest profit of $12 million in 2024. Management expects that the combined segments will improve operating profitability in 2024, as profitability from the Power segment increases and losses at Renewables narrows. A key driver to the profitability bridge is driven by increasing U.S. demand for on- and offshore wind projects, which management expects to have favorable cost and pricing dynamics and sustained investment due to the Inflation Reduction Act.

For Aviation, future orders will be supported by forecasted global defense spending increases in low-single digits, new commercial aircraft production in the mid-teens, and total engine shipments in the mid-20s CAGR through 2025. Additionally, with the large installed base of prior-generation engines, which total over 41,000 commercial engines (which is the largest and youngest in the approximate 50,000 engine fleet worldwide), and 26,000 defense engines, the service revenue stream should allow for stability through industy cycles for GE Aerospace as internal shop visits are forecast to increase by mid-double digits through 2025.

Following the separation, it would appear that GE Aerospace has a more attractive growth profile given the current state of the Aerospace industry cycle, while a drive towards sustained profitable operations will likely be the dominant story told for GE Vernova. In that framework, we posit that current GE investors would favor holding the parent entity post-spin, while we do see incremental demand for Vernova to likely be able absorb any liquidation of shares, be it forced or by choice. We circle back to the GE Healthcare spin-off, with similar characteristics of having a large differential in market capitalizations and being in different industries. Despite the difference in market capitalizations, GEHC remained a member of the S&P 500 following the spin-off, which limited forced selling of shares by index funds. Following the GEHC separation, investor demand largely stabilized the price of GEHC. For Vernova, we expect clean energy-focused investors to be the main buyers. As for relative size, based on our valuation exercise below, we surmise that GE Vernova will be sufficiently large in market capitalization to remain in the S&P 500.

For GE Vernova, we forecast that demand for onshore wind farm projects and sizeable demand for electrification and grid solution products that will be needed to transform economies away from fossil fuels, will drive sustained mid-to-high single digit revenue growth through at least 2025. Given restructuring of projects, easing inflationary pressures, and operating leverage, we forecast the company will operate with an 8% margin before corporate costs. At GE Aerospace, the strength of the company’s engine business, and the new airplane build cycle combined with the sizeable aftermarket business from its current install base should allow the company to drive double digit revenue growth over the next several years. Additionally, improvements in profitability for newer engine models, including the LEAP program, should allow for margin expansion at the former

On a pre-spin, sum-of-the-parts basis, we fairly value shares of General Electric at $145 per share, which includes approximately $24 per share in value from GE Vernova operations, $132 per share in value from the parent company’s aerospace operations, $4 per share from public holdings, and $(15) per share in net debt and liabilities. With upside to our fair value estimate from the current share price of approximately 10%, we rate pre-spin GE shares at a NEUTRAL. Upside to our fair value estimate could be derived from stronger revenue growth at GE Aerospace, which would lead to margins widening beyond our current projects, or an accelerated profitability schedule at GE Vernova. The downside to our fair value estimates largely arises from continued losses at GE Vernova or investors’ lack of demand for Vernova shares, which would result in a lower trading multiple being assigned to the spin company shares.