GE's Reliance on Aviation Business Backfires as Pandemic Halts Travel -- WSJ

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 28, 2020).

General Electric Co. (GE) for decades was the ultimate conglomerate, selling everything from microwave ovens to movies to mortgages. But after a series of financial and operational setbacks, it shed businesses and bet much of its future on the aviation industry.

Now that the coronavirus pandemic has crippled airlines, GE finds its turnaround efforts have stalled and its future is shrouded by uncertainty. Credit-ratings firms have warned of downgrades, and its share price has plumbed new lows ahead of its quarterly report on Wednesday.

"People know they will survive, but the stock shows they don't expect much more than that," Melius Research analyst Scott Davis said.

GE's aviation business, which manufactures and maintains jet engines for Boeing Co. and Airbus SE, is now its largest with $32 billion in annual sales and its most profitable division. GE is also one of the world's biggest jet owners, leasing more than a thousand planes to airlines through its GE Capital.

The company had been betting on steady profits from those businesses to carry it through a restructuring of its power unit, which was wounded by a glut in the market for power-plant equipment.

GE, like many companies confronting the economic damage of the coronavirus, has cut thousands of jobs and pulled its full-year financial forecasts. It also has refinanced some of its debts to give CEO Larry Culp more time to turn around the business.

One major institutional investor said he just started feeling good early this year about GE's recovery, but now sees the clock being reset. For those watching the stock, they see little benefit in the short term.

GE already has warned first-quarter profits will be materially below its prior estimate of 10 cents a share, or roughly $900 million, and it still expects cash flow to be about negative $2 billion.

GE declined to comment, citing the quiet period before reporting quarterly results. In a recent appearance on CNBC, Mr. Culp said GE Aviation is "doing what we need to do to address cost and cash actions so that we can weather the storm however it plays out."

Some investors and analysts expect large accounting charges to adjust for the aviation division's long-term service contracts that are now predicted to be less profitable, along with cuts to the carrying value of some assets like passenger jets owned by GE Capital.

In the past few years, the company has cut its dividend twice to a token penny a share, sold major businesses like transportation and oil, and worked to streamline existing divisions. In February its stock price rallied back above $13. It now sits at $6.26. The market capitalization has slipped below $55 billion.

JPMorgan analyst Steve Tusa, a longtime bear on the stock, recently criticized GE for its accounting assumptions and for putting all its chips on the aerospace sector that had seen strong growth for years.

"We understand that no one could have predicted a Covid-19-like event, but the same was said about Oil & Gas, Locomotives and Power before they collapsed," he said.

GE's profit plunged in recent years, dragged down by hidden costs in its financial-services unit and mismanagement of its core power business. The troubles prompted GE to break itself apart and overhaul its management and board. Mr. Culp joined the board in early 2018 and took over as CEO later that year, and pursued a plan to streamline the company.

The aviation business was an exception, as it benefited from years of investments, including the launch of GE's most advanced engine to power Boeing's MAX program. Vertical Research Partners predicts it may take six years for the fleet of commercial aircraft to get back to 2019 levels of activity.

Mr. Davis of Melius Research sees significant value in GE's aviation business even if it doesn't produce cash flow for the next three years, because customers will need its service and parts for decades to come.

One advantage for GE now, compared with years past: It has built itself a large cash cushion. It recently closed the sale of its biopharma business to Danaher Corp. for $20 billion in cash.

Some analysts were critical of the deal for selling the high-growth business. More recently several investors cheered the move because the previous plan of spinning off the entire health-care division as a separate public company likely would run into problems in the market turmoil.

Credit-ratings firms have acknowledged GE's liquidity is healthy but also flag that its plans to lower debt face delays and the recovery of its key businesses may take years. Also, lower interest rates increase the cost of liabilities such as its pension payments, and a shortfall in insurance reserves in GE Capital.

Earlier this month, Moody's Investors Service changed its outlook on GE's debt ratings to negative, a prelude to a possible downgrade. The agency cited new pressure on GE's aviation business and the airplane-leasing operation, which makes up 40% of a slimmed down GE Capital's assets.

One large GE investor sees a benefit to the company's latest coronavirus-related problems. It provides cover to cut costs more aggressively than otherwise possible. While GE has restructured and cut jobs in the U.S., those moves are harder in Europe, where unions and governments have more clout.

"We wouldn't underestimate the scale of GE's new cost take-out initiative," Citigroup analyst Andrew Kaplowitz told investors last month. "Its diversification and leadership are what should get the company through this difficult time."

Write to Thomas Gryta at thomas.gryta@wsj.com


  (END) Dow Jones Newswires
  04-28-20 0247ET
  Copyright (c) 2020 Dow Jones & Company, Inc.

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