GE Stock Sell-Off on Reverse Stock Split News

After attending GE’s GE virtual outlook meeting and reviewing its announced GECAS transaction, we maintain our fair value estimate of $14.10. The market sold off GE’s stock by over 5% on the trading day, which we speculate is due to the announcement that its board recommended a 1-for-8 reverse stock split to decrease the number of shares outstanding (to take place sometime prior to the annual meeting in early May of 2021). To be clear, a reverse stock split bears absolutely no bearing on the intrinsic value of a firm. We surmise that part of the motivation is removing some of the perception of owning what’s been a sub-$10 stock at various points in time as this can form a bar to institutional ownership. We also believe a higher stock price could encourage longer-term ownership.

At a high level, we think the GECAS deal is slightly less accretive to our fair value estimate than we originally thought when we ran some preliminary figures in the background as this deal contains less transferred liabilities than we expected ($4 billion of non-debt liabilities), but with 46% equity in the combined AerCap-GECAS entity. As we currently model the deal, there’s minor fair value accretion (less than a dime per share versus the 40 to 50 cents per share we speculated previously), but this accretion was offset by other operating puts and takes. While we somewhat agree with management that the deal creates financial value, as it stands, we think most of the potential value creation comes from an aerospace recovery in the combined leasing entity. We also surmise we’re baking in additional contingent liabilities in our assumptions at what remains of GE Capital relative to GE’s internal projections.

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