This year has been an intriguing one for investors in General Electric (NYSE:GE) stock.
The company’s share price has nearly doubled year-over-year, as investors dive into highly cyclical economic reopening plays. Indeed, GE is about as economically sensitive a rebound play as investors could want today.
The majority of the company’s products and services rely on the economic engine roaring (excuse the pun). For those bullish on the post-pandemic future, GE remains well-positioned to take investors on a nice ride.
That being said, investors will note the rather less-than-rosy picture this stock has painted over the past 20 years. Since the departure of late-CEO Jack Welsh in 2001, shares have been on the decline. Years of empire-building left GE with businesses of tremendous size, but also saddled the company with a ton of debt.
In recent years, the debt picture at GE has cast a shadow over the company’s size and reach. It’s turned into the conglomerate every investor wanted to own in past decades to a slow-growth company burdened by extreme levels of debt.
However, the outlook on this front is changing. Here’s one key catalyst I think could continue GE’s upward rise over the medium-term.
Recent GECAS-AER Deal a Win for GE Stock
This deal is an absolutely massive one for GE investors. One wouldn’t know this by looking at the price of GE stock over the past month.
GE shares have basically traded sideways since this announcement. That said, I think investors would do well to consider this stock at these levels, given the following key factors:
- As a result of the deal, GE receives $24 billion in cash.
- Accordingly, the company expects to reduce its debt load by approximately $30 billion.
- GE retains upside to these obligations via a 46% stake in AerCap.
- Furthermore, GE will be entitled to appoint two directors to AerCap’s board.
- AerCap shares have risen 15% since the announcement, despite GE shares remaining flat.
Okay, so the key takeaway here is that GE is able to drastically reduce its debt burden as a result of the deal, which will have reduced GE’s total debt burden by roughly $70 billion since 2018. That’s some pretty decent balance sheet management from CEO Larry Culp.
Additionally, the fact that GE has been able to offload these financing arrangements while retaining some upside via an equity stake in AER stock, is tremendous.
The cash flows provided by GECAS have been under pressure given the state of the global economy. Many of these financing arrangements were for aviation leases, sale-leasebacks and other services. By ridding the company of these assets, GE is able to lower its risk profile significantly.
Furthermore, investors in GE now own a stake in a much lighter and more nimble company with room to invest in growth areas of the business. That’s a really good thing.
GE should be on the top of the watch list of investors seeking post-pandemic rebound plays right now.
GE remains a conglomerate with a troubled balance sheet. CEO Larry Culp will need to engineer more deals like this over the long-term to continue to trim down the fat in an organization that grew big (but also became bloated).
I think GE’s balance sheet looks better than it has in many years. Accordingly, I expect investor interest to considerably improve as the company puts forward increasingly bullish earnings moving forward.
GE remains attractively valued at only 23-times trailing earnings and is likely to continue to produce positive earnings surprises coming out of this pandemic. As a nimbler, leaner economic machine, GE certainly deserves a look today.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.