We Cut Estimates, but Mostly Maintain Value; GE Cheap

The commercial aerospace environment faces rapid degradation relative to prior expectations. Consider that only in March, the International Air Transport Association forecast that revenue passenger kilometers (a widely used measure of demand) would drop by 38% year over year based on both the aftermath of the recession and subsequent government intervention. One month later, IATA dropped the forecast and currently forecast global demand will nearly halve, with the RPK impact fairly broad-based. In other words, no region is spared, even developing regions like the Asia-Pacific region, where large portions of RPK growth originates.

As a result, we revisited our estimates, and cut adjusted EPS estimates for 2020, 2021, and 2022 by approximately 29% (to 32 cents), 17% in 2021 (to 63 cents), and just 8% in 2022 (to 84 cents). We now forecast 2020 industrial free cash flow of $1.2 billion. We still retain our view that GE GE won’t come close to achieve its net debt to EBITDA target of 2.5 times as set by the rating agencies to prevent a credit downgrade. Nevertheless, while there were various puts and takes in our model, we only trim value by less than 2% to $10.80 per share. Sell-side bears now adopt a narrative that pushing out estimates merely reflects a refusal to capitulate, while some buysiders express the view that GE is a “falling knife.” We disagree with both characterizations.

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