Yahoo News GE profits will suffer when Boeing’s 737 MAX returns, analyst explains
General Electric’s (GE) stock is capping off a 30% one-year climb as the industrial giant prepares to report earnings Wednesday morning. But the biggest GE bear on the Street says the good times won’t last, in part because the return of the Boeing 737 Max could be bad news for the industrials giant.
On the surface, it’s a head-scratcher. Economists predict the grounding of the Boeing plane in the wake of crashes and a safety review could shave 0.5% from GDP. GE produces all of the engines for the jet in cooperation with Safran of France. So in theory, the return of the 737 Max to production would benefit GE.
Stephen Tusa, managing director at JPMorgan, believes that GE sells the 737 Max engines at a loss. The better profit, he explains, is in spare parts.
“You have a dynamic where if they are not delivering Maxes, [GE is] actually seeing a higher amount of EBIT margin dollars because they're not delivering loss-leading engines,” he said in an interview with Yahoo Finance’s On the Move. “What we believe GE has done over the last year, is that they've turned around and repurposed some of that capacity to sell into the spare engine market, and that when you sell a spare it’s a lot more profitable. So actually in the near term, the Max coming back in our view will be net negative for them.”
Tusa has had an “underweight” rating on GE since May 2016, with a brief reprieve Dec. 2018-March 2019, which means his bearish stance predates the 737 Max grounding.
His thesis goes well beyond GE’s exposure to the plane, although aviation is the company’s largest source of revenue.
Tusa estimates that GE generated $1.5 billion of free cash flow in 2019 — far from enough to justify his peers’ price targets for the stock, he said. That figure would need to climb to more like $6 billion to $7 billion by 2021. Right now the average price target is $11.54, according to a Bloomberg survey. Tusa’s is $5.
Morgan Stanley analyst Joshua Pokrzywinski just upgraded GE on Thursday, citing a “budding turnaround.” He’s not alone. According to analysts surveyed by Bloomberg, there are 11 buys, 10 holds and 4 sells.
Analysts predict the company earned 17 cents a share last quarter, as revenue dropped 22% to $25.29 billion.
Julie Hyman is the co-anchor of On the Move on Yahoo Finance.
Read the latest financial and business news from Yahoo Finance
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and reddit.
