Sometimes an analyst examines what is going on outside of a company to find out what is going on inside a company. An example of this is the French aerospace company Safran and General Electric, a partner in an engine manufacturing company.
So he decided to think about saffron’s finances. He didn’t like what he found and explained why in a note on Monday.
Investors pretended they didn’t really care what Tusa had to say – General Electric (ticker: GE) shares closed 1.4%, just a hair behind the S&P 500’s profit of 1, 5%. Even so, they might not want to shake him off anytime soon, as one thing he delved into was Saffron’s outlook.
(AIR.France) A320 NEO and
(BA) 737 MAX nozzles.
Tusa essentially has two takeaways after reviewing saffron’s numbers and prospects: Safran is now decidedly more optimistic about the commercial aviation business that has been decimated by Covid-19 than it was last year. And GE’s bookkeeping for sales of commercial aviation services is no longer valid.
First, the air traffic projection. Saffron, wrote Tusa, “has lowered its long-term projections for traffic in  by 15% to 20% year over year to reflect the downturn and the prospect of a long climb. ”
Saffron isn’t the only one who doubts how quickly the aerospace industry will recover from the aftermath of the pandemic. over 1.5 million passengers flew commercially in the US on Sunday, a 37% decrease from 2019 and an increase of nearly 1200% from 2020.
Second, GE’s accounting. After digging deep into Safran’s numbers, Tusa concluded that GE may be making more than its fair share of joint venture sales. The word power is key because, as the analyst pointed out, “CFM remains an opaque shadow in the GE ecosystem.”
Companies really cannot be held responsible for the lack of transparency. CFM is a 50/50 company and neither GE nor Safran consolidates CFM’s engine sales on their books. GE and Safran make matters even more difficult and include service sales for CFM engines in their financial statements. GE and Safran supply different spare parts. So if a CFM engine needs a GE part, GE gets the sale.
Companies really cannot be held responsible for the lack of transparency. CFM is a 50/50 company and neither GE nor Safran consolidate CFM’s engine sales on their books. GE and Safran make things even more difficult and record service sales for CFM engines in their financial statements. GE and Safran supply different spare parts. So if a CFM engine needs a GE part, GE gets the sale.
In the past, GE said about 40% of the aviation industry Commercial aftermarket revenue comes from servicing CFM products that power single-aisle jets like a 737. The 40% statistic is from 2019 and relates to sales of commercial air services in 2020, giving a potential CFM earnings of approximately $ 3.4 billion. GE’s total revenue from commercial air services in 2020 was $ 8.2 billion. Service revenues, including military aftermarket sales, were $ 13.5 billion.
According to Tusa, around 50% of sales with saffron engines come from parts and service of comparable engines. This equates to approximately $ 4.4 billion in CFM service sales for saffron in 2020. This calculation implies that GE’s CFM aftermarket sales are less than that of saffron.
GE helped Barrons Understand the accounting and point out that saffron and GE aftermarket sales don’t have to match. GE makes two parts – the compressor and the high pressure turbine – for two CFM engines, and these parts are being replaced more frequently, according to a company update referred to by Barron. “As a result, GE has historically had aftermarket parts sales that represent more than 50% of total aftermarket parts sales for CFM56 and LEAP engines.”
Saffron did not immediately respond to a request for comment. J.P. Morgan said Barron’s Tusa was not available to add to his research note.
Overall, investors should know that all of the numbers are roughly where they should be. Safran’s consolidated sales of commercial air services declined around 31% to around $ 5.6 billion in 2020. General Electric’s total airline revenue decreased 33% – numbers that reflect the challenging operating environment.
Tusa qualifies as a longtime GE bear despite rating stocks the equivalent of hold. Its target price of $ 5 per share is the lowest on Wall Street. The highest value is $ 15.50.
The rest of his colleagues are not so bearish. Overall, 55% of analysts who cover GE stock prices are buying. The average The buy recommendation for stocks in the Dow Jones Industrial Average is around 60%. The average analyst Price targetExcluding the lowest and highest value, the price is $ 13.50. GE stock trades at $ 13.44 in late trading.
Write to Al Root at [email protected]