GE Is in Focus as Boeing Suspends Production of 737 MAX Jet – Barron’s

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Boeings problems are roiling the aerospace sector. General Electric is a potential victim, even though it does business in lots of other areas.

On Monday, Boeing (ticker: BA) said it would temporarily halt production of its 737 MAX jet, grounded world-wide since mid-March after a second deadly crash in a matter of months. Wall Street, for the most part, has given Boeings suppliers a pass, believing any negative effect from the MAXs troubles were temporary.

But with delays mounting for the MAXs return to commercial service, Wall Street is revisiting its assumptions for 2020. General Electric (GE), a supplier of engines to Boeing, is one firm with a larger than average impact from the MAX jet.

Were working closely with Boeing and our airline customers to ensure the safe return to service of the 737 MAX, a GE spokesperson said. We are partnering with our customers and suppliers to mitigate the impact of the temporary shutdown of the 737 MAX, while protecting the companys ability to accelerate production as needed in the future.

GE makes MAX engines in partnership with Safran (SAF.France). GE management has said the MAX grounding represented a billion-dollar cash headwind in 2019. Of course, the cash is expected to come in the door when MAX jets are finally shipped to customers. Aerospace suppliers get paid at various points in the manufacturing process, but the bulk of the money comes in when Boeing ships planes to customers (and gets its cash).

We think GE has several options available including repurposing equipment, depending on the duration of the 737 MAX production suspension, wrote Credit Suisse analyst John Walsh in a Tuesday research report. He acknowledge the impact on cash flow and adds this does raise the probability of a truncated 737 MAX program which could result in lower future associated aftermarket revenue.

Boeing has orders for more than 4,000 MAX jets in its backlog, to be delivered over many years. Calculating what the impact might be if Boeing loses market share is difficult. Of course, GE supplies Boeings main competitor, Airbus (AIR.France), too.

Walsh rates GE stock the equivalent of Hold. He has a target of $11 for the share price, exactly in line with the stocks level on Friday morning.

Bearish J.P. Morgan analyst Stephen Tusa isnt as sanguine. He rates GE shares the equivalent of Sell and has a $5 target price.

What should not get lost from a big picture perspective, other than peaking market share, is, somewhat related, the fact that Boeing represents 70-plus percent of installed base [and] backlog of commercial engines at GE Aviation, wrote Tusa in a Friday research report.

He still worries that GE Aviation isnt as great a business as others on Wall Street think it is. The businesss dependence on Boeing is one reason he is negative. Dont forget, though, that while 70% exposure is high, there are only two big commercial aircraft makers and they split the market. Having a high share, to some extent, is a sign of a strong product lineup.

Most GE bulls point to the aerospace franchise as the crown jewel of the business portfolio. We may have been too aggressive in our October call for immediate downside at Aviation, added Tusa in his report.

Another bearish analystGordon Hasketts John Inchalso weighed in with a unique take. The grounding can help near-term cash flow, he said.

In the very short run, there may not be much impact on GEs current negative cash drag associated with the MAX, wrote Inch in a Tuesday research report. If the shutdown were to extend beyond a month or so, we believe it should represent a significant future cash benefit for GE as the company wont be producing money losing engines.

In the aerospace business, the original equipment is typically sold with no profit margin, or a minimal one. The real money is made from servicing the equipment over time.

Inch rates shares the equivalent of Sell and has a $7 price target for the stock.

Aerospace stocks are having a good year, despite the MAXs troubles. They have beaten the gains of the S&P 500 and Dow Jones Industrial Average both over the full year and since the second MAX crash.

Aerospace demand around the globe remains strong. The MAX matters, but aviation stakeholders still expect it to come back sooner than later.

GE stock has had a great year, rising more than 50% as turnaround efforts led by new CEO Larry Culp take root. The stock is just off its 52-week high, in contrast to the broader market, indicating there is still a little concern for investors out there. Its likely related to the MAX.

Write to Al Root at allen.root@dowjones.com