GE shares rise after tough week as optimistic analysts defend airline leasing deal

General Electric’s shares rose more than 5% on Monday, with optimistic analysts defending the company’s decision last week to sell its jet leasing business to rival AerCap and new financial guidelines.

On Wednesday, the Boston-based conglomerate announced the sale of GE Capital Aviation Services, or Gecas, the largest remaining asset in the company’s colossal financial arm, GE Capital, to AerCap. GE is acquiring a 46% stake in the combined company and the business will generate about $ 24 billion in cash. As soon as the deal closes in nine to 12 months, GE plans to transfer GE Capital’s remaining debts and assets to the company’s industrial balance sheet.

For GE, the deal moves it further away from GE Capital, which nearly sunk the company after the 2008 financial meltdown, so it can focus on the conglomerate’s industrial core, a focus of CEO Larry Culp.

Following the announcement of the deal, shares fell from more than $ 14 per share to a brief drop to less than $ 12 per share on Thursday’s trading session. Analysts attributed the liquidation to a mix of profit-taking and concerns about what doubling GE Capital’s debt on the industrial balance sheet could do to the company’s debt profile.

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

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

Ritchie dismissed concerns that the business with Gecas and the decision to collapse the rest of GE Capital on the industrial balance sheet would increase the company’s net leverage to an unsustainable level.

GE’s notable bear, Steve Tusa, expressed concern over this last week, saying that the company has “high sustainable leverage … in addition to the fundamentals that we would characterize as mixed with expectations of future earnings that remain very high”.

And S&P Global said it could lower the company’s credit rating after the deal was closed, adding that it estimates that GE’s leverage will increase to about 6 times its assets after consolidating GE Capital’s remaining debt on its balance sheet, “even with GE using the money 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 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.

Andrew Obin of Bank of America, which has a $ 15 buyout rating for the shares, also came to the company’s defense in a note to customers on Monday. Obin noted that some investors may have sold the news that the company would charge a one-time fee of $ 5 billion to reduce the use of something called factoring, or the sale of accounts receivable to another division to account for revenue earlier. The company said it would scale up this practice in 2021 to help simplify its accounting.

More pessimistic analysts pointed out the $ 5 billion charge as an obstacle to the company’s guidance on free cash flow of between $ 2.5 billion and $ 4.5 billion for the year.

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

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

“The change last week basically brings an end to GE Capital and will significantly simplify not only reporting, but also management’s ability to focus again on GE ‘doing things’,” he said. He added that “it creates a strategic option in the industrial portfolio by removing the debt and the parent’s guarantees related to that debt”.