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GE Stock Is Dropping After Culp’s Comments. Here’s Why.


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General Electric CEO Larry Culp.


Courtesy of GE

General Electric
stock was dropping Thursday afternoon after CEO Larry Culp spoke at an investor conference. Culp didn’t say anything earth-shattering, but the aerospace business is bad and it is hurting the company in many ways.

General Electric (ticker: GE) stock was down 3.2%, while the
Dow Jones Industrial Average
and
S&P 500
were up 0.7% and 1%, respectively.

Before the hiccup, GE shares had been on a nice run lately. Shares have gone from a recent 52-week low of about $5.50 to almost $7.50 at the opening of Thursday trading.

Positive Covid-19 vaccine developments have helped GE and all aerospace shares. The aviation value chain has become sensitive to vaccine news. A cure for Covid-19 is the one thing that could accelerate a commercial air-travel recovery much faster than Wall Street is predicting. Most analysts think it will take years for demand to return to 2019 levels.

That is a big deal for GE, because the company is a huge aerospace player. The company makes jet engines in its largest business segment. What’s more, GE Capital, the company’s lending arm, finances a lot of aircraft in its GECAS, short for GE Capital Aviation Services, business.

“GECAS, not surprisingly, is seeing a good bit of pressure here relative to customer deferrals,” Culp said at the conference Thursday. Airline customers just don’t need the planes with fewer people flying. He still feels good about GE’s portfolio of leased aircraft. “85% of the fleet regarded as Tier 1, Tier 2, much better fleet, a more diverse fleet than we had during the great financial crisis.”

That’s good news, but investors don’t always tune into GECAS. The turnaround in the company’s GE Power division and the impact of Covid-19 on commercial aviation takes up more head space.

Culp also talked about aviation, in particular the profitable aftermarket. “This pressure in the aftermarket, the reduced utilization levels, I think we’re looking in the second quarter at a mark there on the CSA book probably in the hundreds of millions of dollars.”

CSA is short for customer service agreements (or arrangements), which are part of GE’s aviation backlog. The company took a small write-off in the first quarter for the falling value of the contracts. The write-down will grow in the second quarter.

All the aviation pressures result in less cash coming in the door, something investors have been focused on lately. Culp indicated that second-quarter industrial free cash flow might be between negative $3.5 and negative $4.5 billion. “Far worse than our down $2.7 billion forecast,” Gordon Haskett analyst John Inch wrote in a Thursday research report reacting to the comments.

RBC analyst Deane Dray, on the other hand, was prepared for GE to burn through more cash in the second quarter and noted that Culp said there was some sequential improvement in aviation. The news didn’t shake his confidence in the stock.

Dray rates GE shares the equivalent of Buy and has a $9 target price for the stock. Inch, on the other hand, rates GE stock Hold and has a $5 price target on the shares. Most analysts, at this point, appear to line up with Dray. Almost two-thirds of analysts covering the company rate shares the equivalent of Buy. The average buy-rating ratio for stocks in the Dow is about 55%.

GE stock is down about 37% year to date.

Write to Al Root at allen.root@dowjones.com

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