GE Raises Hope on Boeings Grounded Jet at Paris Air Show -- Barrons.com
By Al Root
General Electric had lots to tell analysts and investors at the biennial air show outside of Paris on Tuesday, but the Boeing 737 MAX plane was front and center. And no matter who was speaking in Paris, whether GE or its partners in aviation, the message from the industry was consistent: The MAX will fly again soon.
For GE (ticker: GE), the engine supplier for the Boeing (BA) jet, the key point about the MAX grounding is its effect on cash flow. GE management says it represents a $200 million to $300 million hit to free cash flow in coming months, although the impact should reverse when the MAX flies again and Boeing increases production again.
Investors are very focused on cash flow at GE. Many investors prefer cash-flow figures to reported earnings, believing cash is the key metric to judge GE's turnaround, being led by new CEO Larry Culp.
The MAX is obviously the most significant issue facing Boeing. Briefings from its suppliers, such as GE, are a chance for investors to ask more detailed questions about the jet than Boeing may be willing to answer directly.
The back story. The 737 MAX is exclusively powered by the new LEAP engines manufactured by CFM, a longstanding 50/50 joint venture between General Electric and Safran (SAF.France). LEAP engines power many other aircraft besides the MAX; CFM landed a $20 billion order at the air show Monday from the Indian low-fare airline IndiGo.
What's new. Regardless of who is speaking, be it Boeing, GE or CFM, all signs point to Boeing making progress on putting the MAX back into service in just a few months.
"We're in contact with Boeing every day, multiple times every day to make sure that not only are we clear on where they want the rates to be today as well as where they think the rates are going in the rest of 2019 and beyond," GE Aviation CEO David Joyce told attendees, referring to the pace of production for MAX jets. "We're making sure that the re-entry of that fleet as the MAX gets reauthorized for safe flights goes smoothly as the original entry in the service."
The underlying assumption of the entire industry seems to be that the 737 MAX is nearly fixed. CFM said at a separate press briefing Tuesday it expects the embattled jet to be flying again this summer.
Joyce also pointed out that CFM hasn't reduced production rates of the LEAP engine. Instead, the joint venture used a production slowdown at Boeing that followed the grounding of the MAX to prepare for higher aircraft production rates in the future.
Looking ahead. For GE, cash flow from the aviation operation will continue to be a focus for investors. Aviation is the company's best- performing unit, but it is expected to generate less cash from operations than it did last year, mainly because GE Aviation is selling more new products. New engines require a lot of working capital and materials to build and are sold for cost (or close to it).
Cash flow typically improves a few years after new engines are installed, when they begin to need to be serviced. This is the way the engine business has always worked.
GE said it doesn't disclose cash flow for individual products.
Wall Street is still polarized on GE stock and on cash flow from the aviation business. Barclays analyst Julian Mitchell writes that GE's targets for cash flow from aviation are achievable, but Gordon Haskett analyst John Inch believes the Paris update generated new questions about cash flow, rather than addressing concerns.
Normal free cash flow from the aviation business is $3 billion per year, he wrote in a note to clients, substantially less than the $4.2 billion GE Aviation generated in 2018. Mitchell recommends purchasing GE stock and has a $13 target for the share price. Inch believes investors should sell, and has a $7 price target.
Boeing shares rose 2.2% in morning trading, while stock in Safran, GE's partner in the CFM jet venture, was 2.9% higher in overseas trading. GE stock was up 3.6% at $10.41.