GE shares rally after a hard week as bullish analysts defend airline lease

Shares of General Electric rose more than 5% on Monday as bullish analysts defended the company’s decision last week to sell its jet rental business to AerCap and its new financial orientation.

On Wednesday, the Boston-based conglomerate announced the sale of GE Capital Aviation Services, or Gecas, the largest remaining asset in GE Capital’s previously colossal financial sector, to AerCap. GE has a 46% stake in the combined company and the deal will generate about $ 24 billion in cash. Once the deal is closed within nine to twelve months, GE plans to shift GE Capital’s debt and remaining assets to the company’s industrial balance sheet.

For GE, the deal takes it further away from GE Capital, which nearly collapsed the company after the 2008 financial collapse, so it can focus on the conglomerate’s core business, a focus for CEO Larry Culp.

Following the announcement of the deal, shares fell from more than $ 14 per share to briefly fall below $ 12 per share in trading outside of Thursday hours. Analysts attributed the sale to a mix of profit-taking and concerns about what the company’s debt profile could do with the folding of GE Capital’s debt-laden balance sheet.

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

In a note to customers Monday, Goldman Sachs ’Joe Ritchie reiterated his company’s purchase rating with a target price of $ 15 in GE shares. He said the Gecas deal brings GE closer to realizing its potential as a “definitive self-help story based on vaccines in Industrials.”

Ritchie avoided worries that the Gecas deal and the decision to collapse the rest of GE Capital on the industrial balance sheet would increase the company’s net leverage to an unsustainable level.

Steve Tusa, a notable supporter of GE, expressed concern about this last week, saying the company has “sustainable leverage … in addition to the fundamentals we would characterize as combined with expectations about future earnings that remain too elevated “.

And S&P Global said it could lower the company’s credit rating after the transaction closes, adding that it estimates GE’s leverage will increase its assets by about 6 times after consolidating GE Capital’s remaining debt in its balance sheet, “even with GE using cash at closing to reduce debt.”

But Ritchie said it’s not fair to compare the 2021 industry balance sheet that includes GE Capital with the previous year. According to his estimates, Ritchie said GE’s net leverage for 2020, including GE Capital, was more than ten times its assets, so six times the assets would still be an improvement.

Andrew Obin of Bank of America, which has a $ 15 buyout, also came to the company’s defense in a note to customers Monday. Obin noted that some investors may have sold on the news that the company would have charged $ 5 billion to reduce the use of something called factoring or the sale of accounts receivable to another division to record revenue. before. The company said it would scale this practice to 2021 to help simplify its accounting.

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

A “simpler GE comes at a cost, but expect better results,” Obin said of the charge.

And UBS’s Markus Mittermaier told customers on Monday that GE Capital’s consolidation in the industrial balance sheet is a “long-term positive”. He noted that some of GE Capital’s assets will also move into the industrial balance sheet and that the company has enough cash flexibility to manage its debt load.

“Last week’s move essentially puts an end to GE Capital and will significantly simplify not only reporting, but also the ability for management to focus on GE‘ doing things ’again,” he said. He added that it “creates strategic optionality in the industrial portfolio from debt elimination and related matrix guarantees on that debt.”