GE Aerospace‘s (NYSE: GE) shares declined by more than 5% as of 11 a.m. ET today. It’s not often you can blame a stock price decline on an analyst downgrade of another company, but in this case, it’s applicable. Wells Fargo‘s downgrade of GE’s principal partner, Boeing, sent a shock wave through both companies’ share prices.
Should GE Aerospace prospects also be downgraded?
A Wells Fargo analyst downgraded Boeing stock to underweight, arguing that Boeing’s cash-flow difficulties will run into the next investment cycle for the airplane manufacturer. That’s an issue for GE because it’s the leading engine provider to Boeing. Its joint venture, CFM International, provides the sole engine on the Boeing 737 MAX, and GE provides the sole engine the Boeing 777X and one of two engine options on the 787.
Any push-out of the development of a new Boeing model will negatively impact GE, not least as the company develops engines in anticipation of Boeing’s development. GE typically makes money from multiyear servicing of airplane engines after they are sold into new airplanes.
What it means to GE Aerospace investors
While this is merely an analyst opinion, it is based on solid arguments. Boeing looks highly unlikely to meet its medium-term cash-flow target, and new airplane development will take years and cost significant amounts of money.
Still, it’s worth noting that Boeing isn’t abandoning airplane manufacturing anytime soon. Moreover, while a potential equity raise (to help fund new airplane development) isn’t great news for Boeing shareholders, it’s something GE investors should be agnostic over.
After all, an airplane produced with the financial backing of an equity raise will likely be similar to one made without it, and GE Aerospace will benefit all the same.
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Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Here’s Why GE Aerospace Stock Slumped Today was originally published by The Motley Fool
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