General Electric (GE 1.44%) has disappointed investors in 2022. Supply chain logjams, inflationary headwinds, and other operational problems have forced the company to reduce its guidance multiple times this year.

As a result, GE stock has lost a quarter of its value over the past year. However, the industrial giant's plan to split into three companies by early 2024 remains on track. That move could unlock huge upside for GE shareholders over the next few years.

Two strong companies and a big turnaround

General Electric announced its breakup plan in late 2021. The company said it would spin off its healthcare unit as a stand-alone company in early 2023. It would then combine its power, renewable energy, and digital businesses into a single energy-focused entity and spin that off in early 2024. These moves would leave GE as an aviation pure play.

Corporate breakups tend to benefit shareholders because the more focused successor companies often have better management accountability. Additionally, conglomerates usually trade at lower valuations than pure-play companies.

Splitting up will have one additional benefit for GE: the company's aviation and healthcare businesses are highly profitable growth businesses, whereas the energy businesses have struggled. In recent years, investors have repeatedly punished GE stock for the power and renewable energy units' woes. Moving them into a separate company will allow the true value of the aviation and healthcare businesses to shine through.

Recent results highlight the logic

Last week, GE released its Q3 earnings report. The results showed exactly why breaking up could lead to big gains for GE shareholders in the years ahead.

GE's third-quarter adjusted EPS of $0.35 missed the analyst consensus of $0.46. However, GE's renewable energy unit took $0.5 billion in new warranty and related reserves during the quarter. Excluding that unusual item, adjusted EPS would have reached $0.75: up from $0.53 a year earlier. In effect, the renewable energy unit's problems masked the strength of GE's other businesses.

A GE wind turbine in a field.

Image source: General Electric.

Most notably, GE Aerospace (the core of the future GE) continued its rapid resurgence as the COVID-19 pandemic has eased. Revenue jumped 24% year over year to $6.7 billion, and the segment's operating margin expanded to 19.1%: near pre-pandemic levels. As a result, segment profit soared 52% to $1.3 billion.

GE's healthcare unit, which will become independent in early January, also delivered solid results. Revenue rose 6% and segment profit inched up 1% year over year despite significant headwinds from supply chain constraints, inflation, and the strong dollar.

By contrast, the power and renewable energy businesses reported a combined segment loss of nearly $800 million, with revenue down by double digits. Year to date, those units have combined for losses of more than $1.2 billion.

Polish the gems and take out the trash

With a market cap of around $85 billion, GE stock looks fairly inexpensive -- but not deeply undervalued -- based on its projected 2022 free cash flow of $4.5 billion.

GE Market Cap Chart

GE Market Cap, data by YCharts.

But if you consider that GE's cash flow is set to jump next year, due to timing issues that are pushing about $1 billion of cash flow from 2022 into 2023, the stock looks very cheap. And given that the energy-related businesses are burning cash -- so that combined cash flow from the healthcare and aerospace units exceeds total free cash flow -- GE shares look even more attractive.

General Electric has a credible plan to fix its renewable energy business by cutting costs, simplifying its product portfolio, raising prices, and capitalizing on demand growth. But these measures will take time to kick in.

The healthcare and aviation units combined are almost certainly worth significantly more than GE's current market cap. Freeing them of the trickier power and renewable energy businesses will enable the market to recognize that value. Moreover, they will be more nimble as independent companies, which could lead to faster growth going forward. That paves the way to big gains for GE shareholders over the next few years.