GE could be long-term loser in United Technologies-Raytheon merger, analyst says

By GEFOXBusiness

GE investors are beginning to grow comfortable with CEO Larry Culp: Charlie Gasparino

FBN’s Charlie Gasparino reports that major GE investors are growing comfortable with new CEO Larry Culp and that the company is still looking to sell its assets, which includes a steam turbine unit.

A pending tie-up between United Technologies and Raytheon raises questions over the future of General Electric and whether its aviation division can compete against the new behemoth, according to one analyst.

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TickerSecurityLastChange%Chg
UTXUNITED TECHNOLOGIES CORPORATION132.76+0.37+0.28%
RTNRAYTHEON COMPANY180.13+1.56+0.88%
GEGENERAL ELECTRIC COMPANY10.22+0.18+1.79%

The combined firm -- slated to be called Raytheon Technologies Corp. -- will become the world's second-largest aerospace and defense company behind Boeing, presenting new competition for the Chicago-based manufacturer as it deals with the fallout of an international grounding of its 737 Max fleet.

But GE, which is in the midst of trying to turn around its struggling business, is poised to take the most long-term damage, according to Gordon Haskett analyst John Inch.

"To come out and spend money on a new engine program is probably a couple of billion dollars. Well, GE doesn’t have a couple of billion dollars to throw out there," he told FOX Business. "GE is being boxed in strategically and there is very little they can do it about it because they don’t have any financial resources."

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GE Aviation is not expected to generate free cash flow above last year’s levels and available resources could be flat again in 2020, putting pressure on the Boston-based firm’s ability to invest in research and development.

Raytheon Technologies Corp. will have a combined R&D budget of $8 billion, much larger than GE Aviation's $2.4 billion in 2018, according to Inch. That could position the new company to capture future engine programs, like Boeing’s pending 797 midsize jet.

In the near-term, GE still has a strong revenue stream in its service business. The company has an ample number of planes currently in operation and engine manufacturers tend to make the bulk of their earnings in the after-market maintenance.

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But it’s unlikely GE would have much opportunity to ramp up its investment in the aviation division in any real competitive manner.

Top of mind for CEO Lawrence Culp is bolstering the company’s struggling power sector. And any available money, like from the sale of GE’s BioPharma division, will be used to pay down debt, Culp said previously, leaving few available resources for an acquisition or investment elsewhere.

"They are selling everything that’s not nailed down...and have no money to buy anything," Inch said.