GE stock suffered its largest decline in nearly a year as Analyst Day disappoints investors with high expectations

Since closing at a nearly three-year high of $ 13.60 on March 8, the stock is now down 14.6% on a three-day loss streak.

The extended share sale comes after GE announced a $ 30 billion deal to combine its aircraft leasing business (GECAS) with AerCap Holdings NV AER,
+ 8.28%
and surprisingly suggested a 1-for-8 reverse stock split. The company also said that after the GECAS deal, what was left of its GE Capital business would be incorporated into GE Industrial, and provided updated financial guidance during its Analyst Day. Read more about GE’s moves on Wednesday.

Deutsche Bank analyst Nicole DeBlase raised her price target from $ 13 to $ 14 amid improved free cash flow (FCF) outlook in 2022 and 2023 to meet management expectations. She reiterated the hold rating she has had on the stock for the past two years, citing the lack of upward direction against her price target.

While DeBlase “didn’t find many surprises” in GE’s outlook for this year, she believes “positioning / expectations were an important part” of the stock’s subsequent trading move.

“GE has been a consensus among hedge funds for several months now and remains a preferred way to gain exposure to the ‘reopen’ trade, given the importance of the aviation business to both [earnings per share] and FCF, ”DeBlase wrote in a note to customers.

After a quarterly record of 73.4% in the fourth quarter, DeBlase said the stock performed the best among its peer group this year, “so we don’t think expectations can be described as low at the start of the event.”

Aside from the valuation, she said she had heard other ‘not-so-positive’ feedback, including questions about the timing of the GECAS deal as it took place during the cycle, and that the deal was a ‘sneaky’ way to Depreciate GECAS assets. .

Oppenheimer analyst Christopher Glynn said the deal and guidance put GE on a “solid” foundation as it improves capital efficiency and a “solid recovery” is expected in aviation.

But Glynn also expressed concern about valuation, as he downgraded GE to perform after outperforming since November, while scrapping his price target. He said his downgrade was based on valuation, as the stock had surpassed its previous price target of $ 13.

Glynn wrote that “a substantial turnaround implementation and cyclical recovery” is already “priced in at current levels,” but said the longer duration of the debt structure and strong liquidity now provide GE with a “background to emerge from the downturn in aviation. to get into a position “. of resilience. “

Meanwhile, longtime bear / skeptic Stephen Tusa at JP Morgan reiterated the neutral rating he had on GE for the past year, but said he still sees a “material downside” for the stock, according to its $ 5 price target, which is 59%. below the current rate. levels.

Tusa said that while he agrees that a simplified GE is positive after the GECAS deal, he said the deal and financial outlook for him has just “crystallized” into the “real bear case” for the stock.

With GECAS no longer in the picture, Tusa said there are no more GE Capital assets for Wall Street bulls to claim there is enough value / equity to support related debt.

“In short, with the free money from the [COVID-19] vaccine trade, GE’s story as a turnaround gaining momentum with a V-shape in cash and earnings is running into numbers showing sustained high leverage well above targets despite [more than] $ 70 billion in actions on top of fundamentals that we would characterize as mixed with expectations about future earnings that remain too high, ”wrote Tusa.

UBS’s Markus Mittermaier was a little more forgiving, though, as he echoed the buy rating he’s had on GE since December 2019 and his $ 15 price target, implying a 24% gain from current levels.

He said that, despite the “hits” for FCF in the short term, the simplification following the GECAS deal is “strategically a clear positive”. He said he understands for the very short term the ‘negative interpretation’ of some elements of the deal and the outlook, such as the hit to 2021 FCF to further lower the factoring balance, as well as the increase in net debt from the inclusion of GE Capital on GE’s balance sheet.

That said, this has not removed the overhang of factoring future settlements, but rather the risk of the aggregate debt picture that we believe will make investors increasingly willing to ‘endorse’ the new GE that is emerging. , which should help with multiples, ”Mittermaier wrote. “On balance, we think [Wednesday] was an important step in creating a simpler GE with significantly fewer legacy overhangs and improved medium and long-term strategic options. “

GE stock is up 47.3% over the past 12 months, while exchange-traded fund SPDR Industrial Select Sector XLI,
+ 0.10%
is up 46.7% and the S&P 500 index SPX,
+ 1.04%
is up 44.0%.