Aerospace Sector

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Raytheon, GE - >>> GE Stock Pops Despite Some Bad News From Raytheon


Barron's

By Al Root

June 3, 2020


https://www.barrons.com/articles/ge-stock-pops-despite-some-bad-news-from-raytheon-51591197491?siteid=yhoof2


J.P. Morgan analyst Stephen Tusa thinks a recent update about aerospace from Raytheon Technologies is bad news for General Electric. But not everyone on Wall Street agrees.

Raytheon Tech (ticker: RTX)—which is the new combination of legacy Raytheon and United Technologies’ aerospace business—presented at an investor conference Tuesday.

Chief Financial Officer Tony O’Brien said any aerospace recovery would take time and that Raytheon’s free cash flow would be negative in the second quarter of 2020. Analysts were modeling positive free cash flow coming into the event. What’s more, O’Brien said aftermarket activity for portions of the aerospace business was down between 50% and 60% so far in the second quarter.

It wasn’t great news. And Raytheon stock closed down 1.1% on a day the S&P 500 rose 0.8% and the Dow Jones Industrial Average rose 1.1%. General Electric ( GE ) shareholders, however, didn’t get the memo. GE stock rose 4.3% Tuesday. That’s a risk, according to Tusa.

Raytheon’s comments “suggests consensus expectations are not reset” at GE, Tusa argued in a Wednesday research note. General Electric has a larger engine business than Raytheon’s Pratt & Whitney division and a smaller defense engine business. For Tusa, that means things should be a little worse for GE than for Raytheon.

Barclay’s analyst Julian Mitchell, however, didn’t hear Raytheon’s comments like Tusa did. In fact, he call the news “somewhat encouraging.” The entire aerospace industry is facing the same cash flow headwinds. GE isn’t unique.

Mitchell rates GE stock the equivalent of Buy and has a $9 price target for the stock. Tusa, on the other hand, rates shares Hold and has a $5 price target.

The Raytheon news might not have been exactly what investors expected for Raytheon, but its dreadful second quarter isn’t a surprise. More than half of the commercial aircraft fleet is parked because of plummeting demand for flights, and a lot of bad news is already reflected in aerospace shares.

The entire aviation value chain has been hammered by Covid-19. Boeing (BA) and Airbus (AIR.France) are down more than 50% year to date. Aerospace supplier stocks Barron’s track are down about 35% so far in 2020. Airline shares are also down about 50% year to date on average.

Raytheon shares, for their part, are down about 28% and GE stock has fallen about 37% in 2020, as of Tuesday’s closing prices.

Besides what is already reflected in stock prices because of the commercial aerospace downturn there is another reason the Raytheon update might not have hit GE stock. It was old news.

GE CEO Larry Culp spoke at an investor conference this past week and, like Raytheon’s CFO, tamped down expectations for free cash flow because of weakness in aerospace. The stock dropped from about $7.30 to almost $6.50 in the days after his talk. But shares have since rebounded: GE stock is up 3.9%, at $7.32, in recent trading.

After Culp’s talk, many Wall Street analysts weighed in. The weaker cash flow wasn’t good news, but the weakness was consistent with what is going on in the broader industry.

Raytheon shares were bouncing back on Wednesday, with a gain of 5.4% to $66.77 in afternoon trading. The S&P 500 was up 1.3%.

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