GE shares are soaring after a tough week as bullish analysts defend airline leases

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

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 GE Capital, to AerCap. GE will take a 46% stake in the combined company and the deal 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 moves it further away from GE Capital, which nearly scuttled the company after its 2008 financial collapse, allowing it to focus on the conglomerate’s industrial core, a focus of CEO Larry Culp.

Following the announcement of the deal, the stock fell from over $ 14 a share to just below $ 12 a share in after-hours trading on Thursday. Analysts attributed the sell-off to a mix of profit-taking and concerns about what folding debt-laden GE Capital into the industrial balance sheet might do to the company’s debt profile.

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

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

Ritchie brushed aside concerns that the Gecas deal and the decision to drop the rest of GE Capital on the industrial balance sheet will increase the company’s net leverage to unsustainable levels.

Notable GE bear Steve Tusa expressed concern about this last week, saying the company has “sustained high leverage … on top of the fundamentals we would describe 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 transaction is closed, adding that it estimates GE’s leverage will increase to about six times its assets after consolidating GE Capital’s remaining debt on its balance sheet. “even with GE having the cash on exit to reduce debt.”

But Ritchie said it’s not fair to compare the projected industry balance for 2021, including GE Capital, to the previous year. Based on his estimates, Ritchie said GE’s net leverage in 2020, including GE Capital, was more than 10 times its assets, so six times the assets would still be an improvement.

Bank of America’s Andrew Obin, who has a $ 15 buy rating on the stock, also came out in a note to clients on Monday in defense of the company. Obin noted that some investors may have sold on the news that the company would charge a one-time fee of $ 5 billion for the use of something called factoring, or the sale of receivables to another division to bring in the revenue sooner. to decrease. The company said it would scale that practice in 2021 to simplify accounting.

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

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

And UBS ‘Markus Mittermaier told his clients Monday that the consolidation of GE Capital in the industrial balance sheet is a’ long-term positive ‘. He noted that some of GE Capital’s assets will also be moved to the industrial balance sheet and the company has enough liquidity flexibility to handle its indebtedness.

“Last week’s move essentially puts an end to GE Capital and will significantly simplify reporting as well as the ability for management to focus back on GE’s ‘making things’,” he said. He added that it “creates strategic optionality in the industrial portfolio by removing debt and related guarantees from the parent company for that debt.”