GE shares rally after tough week as bullish analysts defend jet lease deal

General Electric stock jumped more than 5% on Monday as bullish analysts defended the company’s decision last week to sell its jet leasing business to rival AerCap and new financial forecasts.

On Wednesday, the Boston-based conglomerate announced the sale of GE Capital Aviation Services, or Gecas, the largest remaining asset of the once-colossal financial arm of the company, GE Capital, to AerCap. GE takes a 46% stake in the merged company and the transaction will generate approximately $ 24 billion in cash. Once the deal is completed in nine to 12 months, GE plans to transfer GE Capital’s remaining debt and assets to the company’s industrial balance sheet.

For GE, the deal takes it away from GE Capital, which nearly sank the company after the 2008 financial collapse, so it could focus on the industrial core of the conglomerate, a goal for CEO Larry Culp.

After the deal was announced, the stock fell from over $ 14 per share to a brief drop below $ 12 per share on Thursday after business hours. Analysts attributed the sale to a mix of profit taking and concerns that pulling back into the debt-laden GE Capital industrial balance sheet in the industrial balance sheet could impact the company’s debt profile. ‘business.

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

In a note to customers on Monday, Joe Ritchie of Goldman Sachs reiterated his company’s buy note with a target price of $ 15 on GE stock. He said the Gecas deal brings GE one step closer to realizing its potential as the “ultimate story of vaccine self-help and industry mobilization.”

Ritchie brushed aside concerns that the Gecas deal and the decision to collapse the rest of GE Capital in the industrial balance sheet would raise the company’s net indebtedness to unsustainable levels.

Famous GE bear Steve Tusa voiced his concerns about this last week, saying the company has “sustained high leverage … on top of what we would call fundamentals mixed with expectations on future profits which remain too high ”.

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

But Ritchie said it wasn’t fair to compare the forecasted industrial balance sheet for 2021 that includes GE Capital to the year before. Based on his estimates, Ritchie said that GE’s net leverage for 2020, including GE Capital, was more than 10 times its assets, so six times assets would still be an improvement.

Andrew Obin of Bank of America, who has a buy note of $ 15 on the stock, also came to the company’s defense in a note to customers on Monday. Obin noted that some investors may have sold upon learning that the company would take a one-time fee of $ 5 billion to reduce the use of something called factoring, or the sale of accounts receivable to another division to record. income earlier. The company said it would scale the practice back in 2021 to help simplify its accounting.

More bearish analysts pointed out that the $ 5 billion charge was a drag on the company’s forecast of free cash flow of between $ 2.5 billion and $ 4.5 billion for the year.

A “simpler GE comes at a cost, but expect beating and uplifting results from here,” Obin said of the accusation.

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

“Last week’s move essentially ends GE Capital and will dramatically simplify not only reporting, but management’s ability to re-focus on GE ‘doing things’,” he said. He added that this “creates a strategic option in the industrial portfolio by removing the debt and the parent company’s guarantees on that debt.”