Larry Culp, CEO of General Electric
Scott Mlyn | CNBC
General Electric stock rose more than 5% on Monday as bullish analysts last week defended the company's decision 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 in the company's once colossal financial arm, GE Capital, to AerCap. GE has a 46% interest in the combined company and the deal will generate approximately $ 24 billion in cash. Once the deal is closed in nine to twelve months, GE plans to move the remaining GE Capital debt and assets onto the company's industrial balance sheet.
For GE, the deal marks another departure from GE Capital, which nearly sank the company after the 2008 financial meltdown, allowing it to focus on the industrial core of the conglomerate, a focus 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 in after-hours trading on Thursday. Analysts attributed the sell-off to a mixture of profit-taking and concerns about what adding debt-laden GE Capital to its industrial balance sheet could do to the company's debt profile.
But on Monday bullish analysts from UBS, Goldman Sachs and Bank of America came to defend the company, praising the merits of the Gecas deal and GE's cash position.
In a statement to customers on Monday, Joe Ritchie of Goldman Sachs reiterated his company's buy recommendation with a price target of USD 15 on GE shares. He said the Gecas deal brings GE closer to realizing its potential as the "ultimate self-help story with vaccine leverage in the industry".
Ritchie brushed aside concerns that the Gecas deal and the decision to add the rest of GE Capital to its industrial balance sheet will push the company's net debt to unsustainable levels.
Notable GE bear Steve Tusa expressed concern over this past week, saying the company has "sustained high leverage … on top of fundamentals, which we would describe as mixed with expectations for future earnings that remain too high . "
And S&P Global said it could lower the company's credit rating once the deal closes, adding that GE's leverage will increase to six times its assets after GE Capital's remaining debt is consolidated on its balance sheet , "Even if GE has the cash on graduation to reduce debt."
But Ritchie said it wasn't fair to compare GE Capital's expected 2021 industrial balance sheet to last year. Based on his estimates, Ritchie said that GE's net leverage for 2020, including GE Capital, was more than 10 times its wealth, so six times its wealth would still be an improvement.
Free cash flow
Bank of America's Andrew Obin, who has a buy rating of $ 15 on the stock, also came in to defend the company in a notice to clients on Monday. Obin noted that some investors may have sold 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 accounts receivable to another division to post earnings earlier to reduce. The company announced that it would scale this practice as early as 2021 to simplify accounting.
More bearish analysts pointed to the $ 5 billion burden that hurt the company's forecast for free cash flow of between $ 2.5 billion and $ 4.5 billion for the year.
A "simpler GE comes at a price, but expect better results from here," Obin said of the indictment.
And Markus Mittermaier from UBS told clients on Monday that the consolidation of GE Capital in the industrial balance sheet was "positive in the long term". He noted that some of GE Capital's assets will also be included on the industrial balance sheet and that the company has sufficient liquidity flexibility to handle its debt burden.
"Last week's move essentially kills GE Capital and will make reporting a lot easier, but also management's ability to focus on getting GE doing things again," he said. He added that it "creates strategic optionality in the industrial portfolio by eliminating debt and related parent company guarantees for that debt."