General Electric's prized aviation financing and leasing business is "already in liquidation mode" and has weakening earnings that are "masked by gains," J.P. Morgan analyst Stephen Tusa said Tuesday.
GE Capital Aviation Services has been called the crown jewel of the GE Capital portfolio and is valued as high as $40 billion, according to Reuters. But Tusa, who has garnered a wide following for his work on GE, said in the note that GECAS is "not earning $1.2 billion" a year, as the company has said.
In an investor note, Tusa said GE Capital Aviation Services is "selling higher return assets to pay for its lower return order book." That, he said, is causing the unit's declining earnings to be "masked by gains not disclosed in earnings reports or filings." He said GECAS is buoying earnings by choosing to allocate interest into "an overlooked 'other continuing operations' category" that is no longer relevant.
"This portfolio is already being liquidated to support an order book GE cannot currently afford," Tusa said.
GE CEO Larry Culp sat down with Tusa later on Tuesday in an interview at J.P. Morgan's aviation, transportation and industrials conference. Culp responded directly to Tusa's note in his comments by defending the aviation financing business.
"This is a strong franchise we have … we think GECAS is making money," Culp said. "If you step back a little bit: GECAS is a strong, profitable business."
In his note, Tusa said "most analysts" on GE accept the $1.2 billion a year figure "as sustainable fact," and therefore "conclude that this is an highly valuable asset."
"We disagree, and see a franchise that is actually, on a run rate, barely breakeven on a pre-tax basis, heavily cash flow negative, supported only by fleet liquidation, which is perpetuating a declining revenue base," Tusa said.
J.P. Morgan has a neutral rating and a $6 price target on GE shares.