How GE Investors Could Benefit From The Boeing Groundings

JPMorgan analyst and General Electric Company GE bear Stephen Tusa said this week the grounding of the Boeing Co BA 737 Max could be good news for GE’s numbers when it reports second-quarter earnings July 31.

On Tuesday, Gordon Haskett analyst John Inch said GE’s second-quarter cash flow could be better than expected but reiterated his Underperform rating and $7 price target for the stock.

Boeing's Pain In GE's Gain

Despite his bearish outlook for GE, Tusa said 737 Max problems likely provided a shot in the arm for GE’s free cash flow in the second quarter. Inch agreed, but said GE’s road in the second half of 2019 will be an uphill climb.

Large aerospace equipment sales such as aircraft engines tend to be cash-flow negative for GE. Instead, the company profits off maintenance and repairs over the 20- or 30-year lifetime of the engines. As a result, less engine sales and a higher mix of high-margin parts sales should help boost GE’s free cash flow in the second quarter.

Conservative Guidance

GE guided for second-quarter cash burn of between $1 billion and $2 billion, but Tusa is expecting just $700 million in cash burn. Inch told Benzinga on Wednesday he's even more optimistic about GE’s second-quarter cash flow. However, he said the bigger concern is its longer-term cash flow outlook.

“I would not be surprised to see the free cash in the 2Q to be only mildly negative (vs down $1-2bn guide), while the key to share price performance from here [will] be the 3rd quarter guide and by inference the full year of zero to down $2bn, which I think is just too low and likely ends up slightly positive,” Inch told Benzinga in an email.

“That doesn’t mean GE’s cash outlook is good, it just means they guided well below the actual results and were able to pull levers such as reducing restructuring and cutting capital expenditures, as well as the other things they pull (ie, running operating cash through the investing section of the CF statement such as for Aviation)," he said.

Tougher Road Ahead

Despite the near-term improvements to cash flow, Tusa and Inch remain bearish on GE's stock. More 737 Max engine deliveries would be better for GE in the longer term. Boeing this week said the 737 Max remains grounded while the company continues testing its updated software, and management provided no timetable for the airplane’s return.

“Looking ahead, the advent of tougher cash comparisons – including contract asset/LTSA cash benefits realized in 2018 – coupled with a waning global economic outlook could significantly disrupt the future cash ‘beat’ narrative,” Inch said.

GE shares are up 5.4% this week ahead of the July 31 earnings print. The stock traded around $10.68 per share at time of publication.

Related Links:

Boeing Reports Q2 Earnings Miss

JPMorgan Downgrades GE, Says Street 'Significantly Over Projecting' Cash Flow

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