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J.P. Morgan analyst Stephen Tusa believes the assumptions underpinning Wall Street price targets for GE stock are too optimistic.

Sebastien Bozon/AFP via Getty Images

A lot has changed at

General Electric

in the pat three years since CEO Larry Culp took over to turn around the industrial giant. Assets have been sold, debt is reduced and business segments have been restructured. After all the changes, J.P. Morgan analyst Stephen Tusa took a fresh look at GE based on the sum-of-the-parts, or SOTP, analysis. He still doesn’t like what he sees.

Tusa believes the assumptions underpinning Wall Street SOTP-based price targets for GE (ticker: GE) stock are too optimistic. What’s more, Tusa says the stock is 20% overvalued based on his SOTP analysis.

SOPT analysis is one way investors and analysts can come up with a value of a company. It values each of the firm’s business units separately, trying to unlock hidden value by looking at things a little differently than only price-to-earnings ratios and cash flows.

GE for its part has an aviation business that has generated about $21 billion in sales over the past 12 months. Wall Street expects 2023 aviation Ebitda—short for earnings before interest, taxes, depreciation, and amortization—to be about $6.6 billion and Tusa suggests his peers are using a 12 times multiple valuing the unit at about $79 billion.

GE’s second-largest business is its health-care franchise which has generated more than $18 billion in sales over the past year. Analysts’ 2023 Ebitda projections are about $4.3 billon, and Tusa uses a 14.5 times multiple valuing it at about $62 billion.

The company’s power and renewable energy divisions did just under $18 billion and about $16 billion, respectively, over the past 12 months. Ebitda estimates for 2023 are about $2.2 billion and $700 million, respectively, and at 4.5 times multiple for power and 20 times for renewables, the two businesses are worth about $10 billion and $14 billion, respectively.

GE’s power division gets a low multiple because it serves coal- and natural-gas-based power generation. That will decline as renewables take power-generation market share over time. The company’s renewables unit gets a higher valuation multiple because of that growth.

GE Capital, its lending arm, is shrinking, and the overall company’s lending operations are, essentially, being folded into the the businesses they support. Soon, there won’t be a separate GE Capital business segment.

Adding it all up, investors get about $165 billion. Then adjusting for corporate overhead, debt, pensions, and legacy insurance liabilities and Tusa ends up with a $143 billion market capitalization, which equates to a $130 stock price. Tusa, however, prefers to use lower multiples for each business while projecting lower 2023 Ebitda. That lands him at $85 a share.

That’s his SOTP-based number. His official price target is $55—the lowest on Wall Street. Tusa rates GE shares at Hold.

The valuation exercise is useful for investors, but not because it shows who could be right or wrong about estimates and multiples. SOTP analysis shows how hard it is to make judgments about absolute value. That’s why it’s very important for investors to watch valuation, and to keep an eye on whether things are getting better or worse at a company.

For now, things are getting better at GE. The company increased free-cash-flow guidance when it reported the second quarter of 2021. Investors will want to see more improvement to get the stock higher, regardless of Street valuation debates.

Better cash flows is a big reason GE stock is up 20% year to date, a little better than the 16% and 13% comparable, respective returns of the

S&P 500

Dow Jones Industrial Average.

Write to Al Root at allen.root@dowjones.com

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