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General Electric Co. will likely suffer such a steep drop in earnings this year because of the coronavirus pandemic that its debt reduction target is “unachievable,” said UBS analyst Markus Mittermaier.
GE Chief Executive Larry Culp had said in early March, in a business update call with analysts, that the industrial net-debt-to-Ebitda (earnings before interest, taxes, depreciation and amortization) ratio at the end of 2019 was 4.2x, and the target was to get that leverage ratio down to “less than 2.5 times” in 2020.
Mittermaier was already skeptical about that target, as he had previously expected leverage of 2.6x in 2020. But given the impact of the coronavirus crisis on GE’s businesses, particularly the aviation business, “we believe the 2020 earnings drop is so steep that we revise our industrial net debt/Ebitda expectations from 2.6x to 7.4x,” Mittermaier wrote in a note to clients. Read S&P Global’s take on GE’s leverage.
Don’t miss: GE issues debt to pay down some debt, repaid $6 billion in loans to GE Capital.
In his “base case” scenario for GE GE, +2.87%, as the coronavirus crisis starts to dissipate, he doesn’t expect leverage to get below 2.5x until 2022.
Mittermaier cut his 2020 earnings per share estimate to 8 cents from 54 cents, his 2021 estimate to 41 cents from 87 cents, and his 2022 outlook to 70 cents from 96 cents. That compares with the FactSet EPS consensus for 2020 of 38 cents and for 2021 of 57 cents. GE is expected to report first-quarter earnings on April 29.
Also read: GE sees profit ‘materially below’ but FCF ‘near’ prior expectations.
On the bright side, his “base case” still warrants a buy rating for GE’s stock. And although he cut his stock price target to $9 from $12, the new target implies a 37% gain from current levels.
GE’s stock rallied 2.2% in afternoon trading. It has gained 7.5% over the past month, but was still down 41.1% year to date, while the Dow Jones Industrial Average DJIA, +0.91% has run up 26.8% the past month but lost 17.4% this year.
He said the recovery path for GE’s aviation business is the “dominant driver” of the investment case for the stock. Although the military business is mostly unaffected, the commercial aviation business faces “unprecedented challenges.”
In the base case, Mittermaier assumes that global flight hours will decline by about 40% this year, then recover 15% in 2021. He doesn’t expect a return to pre-coronavirus flight hours until 2024. Under those assumptions, he cut his 2020 free cash flow (FCF) forecast for aviation by 70% to about $1.2 billion and lowered his 2021 estimate by 60% to $2.2 billion, and now sees 2022 cash flow of about $4 billion.
For overall industrial FCF, his base case estimates are -$1.3 billion in 2020, +$1.3 billion in 2021 and +5.6% in 2022. That compares with his “upside case” forecasts of $-1.3 billion, +$1.7 billion and +$6.8 billion through 2022, while his “worst case” estimates call for -$2.2 billion, -$0.3 billion and +$3.2 billion.
For those wondering, Mittermaier’s upside case called for an 88% gain in the stock from Wednesday’s closing level, which would put it around $12, while the worst case suggests a 30% decline, which implies a price of about $4.50.
