GEs Sale of Baker Hughes Stock Means There's Finally a Plan, Analyst Says -- Barrons.com
By Teresa Rivas
General Electric's decision to reduce its stake in Baker Hughes a GE Company is another important step in the former's deleveraging journey, argues Credit Suisse, although the firm isn't ready to be bullish just yet.
The back story. After the steep decline in oil prices that began in 2014, plenty of energy-related firms found themselves struggling. Baker Hughes (ticker: BHGE) was no exception, and ultimately merged with GE Oil & Gas in 2017. However, in recent years GE (GE) has had plenty of struggles of its own, including the need to lower its debt profile, and reducing its stake in Baker Hughes has long been anticipated as a part of this process. GE unsurprisingly announced plans to lower the ownership stake in Baker Hughes earlier this week, and one analyst argues that it was a good thing to finally have a concrete plan in place.
What's new. Credit Suisse analyst John Walsh reiterated a Neutral rating and $11 price target on GE on Friday, writing that "the ownership reduction is consistent with GE's strategy to deleverage and strengthen the balance sheet." Along with the company's recent sale of PK AirFinance to Apollo for $3.7 billion, and sales of GE Transportation to Wabtec (WAB) and its biopharma business to Danaher (DHR), should give GE about $38 billion in cash.
GE has already stated that achieving its targeted GE Industrial leverage of less than 2.5 times net debt to earnings before interest, taxes, depreciation and amortization would require $25 billion of debt reduction (from $51 billion, as it stood in the second quarter of 2019), so putting cash to work in this manner is good news, Walsh believes. Also, management has already announced an offer to purchase $5 billion of existing debt and said there's potential for more deleveraging to come.
Looking ahead. Even with these moves, Walsh isn't ready to call GE a buy. Still, he notes that the company's third-quarter report could be a catalyst, if investors get evidence of a ramp up in free cash flow. In a best-case scenario, which includes ongoing improvements to GE's balance sheet, he sees the shares climbing to $13.
GE is up 0.7% to $9.32 in recent trading.