GE shares rise after difficult week as clumsy analysts defend airline leasing deals

General Electric’s shares rose more than 5% on Monday, while bullish analysts defended the company’s decision last week to sell its jet leasing business to AerCap and competitive financial management.

On Wednesday, the Boston conglomerate announced that GE Capital Aviation Services, or Gecas, the largest remaining asset of the once colossal financing arm GE Capital, would be announced to AerCap. GE takes a 46% stake in the combined company and the deal will generate approximately $ 24 billion in cash. Once the transaction closes in nine to twelve months, GE plans to shift the remaining debt and assets of GE Capital to the company’s industrial balance sheet.

For GE, the deal shifts it further away from GE Capital, which nearly sank the company after the 2008 financial crash, so it can concentrate on the conglomerate’s industrial core, a focus for CEO Larry Culp.

Following the announcement of the deal, the stock fell more than $ 14 per share until Thursday just below $ 12 per share. Analysts attributed the sell-off to a mix of profit-taking and concerns about what the debt-laden GE Capital could do in the industrial balance sheet on the company’s debt profile.

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

Joe Ritchie of Goldman Sachs reiterated in a comment to clients on Monday, repeating the purchase price of his firm with a price target of $ 15 on GE shares. He said the Gecas agreement moves GE closer to realizing its potential as the ‘ultimate story of self-help, used by vaccines in Industries.’

Ritchie is concerned that the Gecas deal and the decision to fold the rest of GE Capital into the industrial balance sheet are raising the company’s net leverage to an unsustainable level.

The conspicuous GE bear Steve Tusa last week expressed concern about this, saying that the company has ‘sustainable high leverage – above and beyond the basics, we would characterize it as mixed with expectations about future earnings remaining too high.’

And S&P Global said it could lower the company’s credit rating after the deal was finalized, adding that it estimates GE’s leverage will increase its assets by about 6 times after GE Capital’s remaining debt on its balance sheet consolidated, even with GE providing cash at closing to reduce debt. ‘

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

Bank of America’s Andrew Obin, who has a $ 15 stake on the stock, also came to the company’s defense on Monday. Obin noted that some investors may have sold the news that the company would take a one-time $ 5 billion levy to reduce the use of something called factoring, or the sale of accounts receivable to another division, to raise revenue sooner. to book. The company said it would increase practice in 2021 to simplify accounting.

More clumsy analysts pointed to the $ 5 billion levy as a weakening of the company’s free cash flow guidance of between $ 2.5 billion and $ 4.5 billion for the year.

“A simpler GE has a cost, but expect you to beat and increase the results from here,” Obin said of the charge.

And UUS’s Markus Mittermaier told clients on Monday that the consolidation of GE Capital in the industrial balance sheet is a ‘long-term positive’. He noted that some assets of GE Capital will also move to the industrial balance sheet and that the company has sufficient cash flexibility to handle its debt burden.

“The move last week essentially puts an end to GE Capital and it will greatly facilitate not only reporting, but also the ability of management to refocus on ‘making things’,” he said. He added that it “creates strategic option in the industrial portfolio to remove debt and related parent company guarantees on debt.”