GE shares rally after hard week as rising analysts defend jet lease agreement

Shares of General Electric rose 6 percent on Monday as rising analysts defended the company’s decision to sell its jet leasing business to rival AerCap and its new financial guidelines.

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

For GE, the deal takes it further away from GE Capital, which nearly sank 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 transaction, shares fell from more than $ 14 per share to a brief drop below $ 12 per share in trading after Thursday. Analysts attributed the sale to a mix of profit-making and concerns about what could make the debt-laden GE capital bending in the company’s balance sheet out of the company’s debt profile.

But on Monday, rising 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, Joe Ritchie of Goldman Sachs reiterated his company’s buy rating of $ 15 per GE share. He said the Gecas agreement brings GE closer to realizing its potential as “the latest self-help story used by the vaccine in the industrial industry.”

Ritchie has allayed concerns that the Gecas agreement and the decision to collapse the rest of GE Capital’s balance sheet will increase the company’s net leverage to an unsustainable level.

Remarkable GE bear Steve Tusa expressed concern about this last week, saying the company has “a high sustainable leverage … in addition to the fundamentals that we would characterize as mixed with expectations of future earnings.” which remain too large ”.

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

But Ritchie said it is not fair to compare the expected 2021 industrial balance sheet that includes GE Capital with the previous year. Based on his estimates, Ritchie said GE’s net leverage for 2020, including GE Capital, was more than 10 times its assets, so six times the assets would continue to improve.

Bank of America’s Andrew Obin, who has a $ 15 per share buy rating, 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 will receive a one-time fee of $ 5 billion to reduce the use of factoring or the sale of accounts receivable to another division to account for revenue earlier. The company said it will scale this practice in 2021 to simplify its accounting.

Several rising analysts have pointed out that the $ 5 billion tax is an obstacle to the company’s free cash flow of between $ 2.5 billion and $ 4.5 billion for that year.

“A simpler GE has a cost, but expect better and bigger results from here,” Obin said of the indictment.

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

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