General Electric has offered a detailed plan for how it will reduce its debt load in coming years.
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Industrial conglomerate General Electric is continuing its balance sheet transformation, unveiling Wednesday the next phase of debt reduction to come after the company completes the sale of its jet-leasing business to AerCap.
Investors liked what they heard. General Electric stock rose 3.5% Wednesday. The S&P 500, for comparison, rose 0.3%. The Dow Jones Industrial Average tacked on 0.6%.
Analysts are now weighing in, and most of the opinions expressed line up with current ratings.
Bank of America analyst Andrew Obin, for instance, rates GE stock Buy and has a $15 price target for shares. He seemed pleased with Wednesday’s incremental information, writing that GE should be able to meet its new debt reduction targets and that profit margins can improve in years to come. “GE’s medium-term earnings recovery is underpinned by broader aviation recovery, with deleveraging and simplification magnifying benefits for GE shares,” says.
GE plans to take net debt—at both GE Capital and GE’s industrial businesses—from roughly $80 billion currently to down to $45 billion after closing the jet-leasing sale. From there, GE plans to reduce net debt to roughly $30 billion by around 2023.
J.P. Morgan analyst Stephen Tusa, however, has some questions about GE’s free cash flow which, of course, is needed to repay debt in the future. Tusa is a longtime GE bear; he currently rates GE shares Hold and has one of the lowest price targets on the Street at $5 a share.
The analyst appears to believe that GE’s current 2021 free cash flow guidance—while disclosed and talked over endlessly by analysts—is complicated.
In particular, Tusa believes GE’s guidance for working capital adjustments is leading his peers to overstate the true free cash flow generating ability of GE’s businesses. Tusa, for his part, projects about $3.5 billion in free cash flow in 2022. The Wall Street consensus is between $5 billion and $6 billion.
Working capital is the cash tied up in inventories and accounts receivable, as well as the cash brought in with short-term finance options. When a company is stable, or growing slowly, that amount of money doesn’t change all that much, so working capital changes have little impact on free cash flow. But GE is unwinding a large finance arm and selling businesses, so its working capital is now fluctuating from year to year.
Meanwhile, UBS analyst Markus Mittermaier is more bullish and, like Obin, rates shares Buy and has a $15 price target.
Mittermaier isn’t worried about all the working capital adjustments and wrote in a Wednesday note that GE’s cash flow goals actually look conservative. GE plans to have about $45 billion in total debt by 2023 and roughly $15 billion in cash. (Those two numbers combine for the roughly $30 billion in net debt by around 2023.) He sees “substantial incremental upside” to the $15 billion cash figure, which “could give GE Capital allocation flexibility to switch to offense as they put it in further reshaping the portfolio.”
Offense means things such as M&A activity, which would be a new catalyst for GE stock. RBC analyst Deane Dray, however, sees other catalysts ahead, before any M&A happens. Dray doesn’t believe GE is done reshaping its business portfolio. “The power portfolio isn’t core to the company,” Dray tells Barron’s. That means the hydropower, nuclear, and electricity grid businesses could be sold. GE’s digital business—known as Predix—could be sold, too. Those would be possible sources of more cash—beyond current management guidance—for additional debt paydown.
Dray rates shares Buy and increased his price target to $15 from $13 a share earlier this week. He was encouraged by all of GE’s recent updates and sees more good things ahead for the stock.
Write to Al Root at [email protected]
