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GE stock rallies after tough week as bullish analysts defend jet-leasing deal

Larry Culp, CEO, Universal Electric

Scott Mlyn | CNBC

General Electric stock surged 6% on Monday as bullish analysts ward off the company’s decision to sell its jet-leasing business to rival AerCap and its new financial guidance.

On Wednesday, the Boston-based conglomerate declared the sale of GE Capital Aviation Services, or Gecas, the largest remaining asset of the company’s once-colossal finance arm, GE Capital, to AerCap. GE is prepossessing a 46% stake in the combined company, and the deal will generate about $24 billion in cash. Once the apportion closes in nine to 12 months, GE plans to shift GE Capital’s remaining debt and assets onto the company’s industrial stability sheet.

To GE, the deal moves it further away from GE Capital, which nearly sank the company after the 2008 pecuniary collapse, so it can concentrate on the conglomerate’s industrial core, a focus for CEO Larry Culp.

After the announcement of the deal, the stock level from over $14 per share to briefly dipping below $12 a share in after-hours trading on Thursday. Analysts attributed the sell-off to a mix of profit-taking and concerns hither what folding the debt-laden GE Capital into the industrial balance sheet could do to the company’s debt profile.

But on Monday, bullish analysts from UBS, Goldman Sachs and Bank of America report ined to the company’s defense, extolling the merits of the Gecas deal and GE’s cash position.

Debt

In a note to clients on Monday, Joe Ritchie of Goldman Sachs restated his firm’s buy rating with a $15 price target on GE stock. He said the Gecas deal moves GE closer to realizing its implicit as the “ultimate self-help, vaccine-leveraged story in Industrials.”

Ritchie brushed away concerns that the Gecas deal and the determination to collapse the remainder of GE Capital into the industrial balance sheet will increase the company’s net leverage to an unsustainable level.

Outstanding GE bear Steve Tusa flashed concerns about this last week, saying the company has “sustainably exorbitant leverage … on top of fundamentals we would characterize as mixed with expectations on future earnings that remain too high-class.”

And S&P Global said it might lower the company’s credit rating after the transaction closes, adding that it guesstimates that GE’s leverage will increase to about six times its assets after it consolidates GE Capital’s remaining debt onto its preponderance sheet, “even with GE using the cash at closing to reduce debt.”

But Ritchie said it’s not fair to compare the demanded 2021 industrial balance sheet that includes GE Capital to the prior year. Based on his estimates, Ritchie predicted GE’s 2020 net leverage, including GE Capital, was more than 10 times its assets, so six times assets would quietly be an improvement.

Free cash flow

Bank of America’s Andrew Obin, who has a $15 buy rating on the stock, also came to the companionship’s defense in a note to clients on Monday. Obin noted that some investors may have sold on the news that the entourage would take a $5 billion one-time charge to reduce the use of factoring, or the selling of accounts receivable to another breaking up to book the income earlier. The company said it would scale that practice back in 2021 to help disentangle its accounting.

More bearish analysts pointed to the $5 billion charge as a drag on the company’s guidance on free currency flow of between $2.5 billion and $4.5 billion for the year.

A “simpler GE comes at a cost, but expect beat and animate results from here,” Obin said of the charge.

And UBS’ Markus Mittermaier told clients Monday that the consolidation of GE Top-hole into the industrial balance sheet is a “long-term positive.” He noted that some assets from GE Capital last will and testament also move into the industrial balance sheet and that the company has sufficient cash flexibility to handle its indebtedness load.

“The move last week essentially brings an end to GE Capital and will significantly simplify not only reporting but also the facility for management to focus on GE ‘making things’ again,” he said. He added that it “creates strategic optionality in the industrial portfolio from unfastening debt and related parent company guarantees on that debt.”

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