General Electric (GE) - Get Report was surging Wednesday after a UBS analyst raised his price target for the iconic industrial giant to $15 from $14 on positive signs regarding the company's pension liability.
Shares of the Boston company at last check were up 4.5% to $13.56.
UBS analyst Markus Mittermaier, who affirmed a buy rating on the stock, said the COVID-19 relief bill that the House of Representatives passed could potentially reduce GE's unfunded pension liability.
"This would benefit GE by extending shortfall amortization from 7 to 15 years as well as stabilizing assumptions for interest rates," the analyst said in an investors' note.
Mittermaier said the latter could mean that funding requirements of the Employee Retirement Income Security Act of 1974, or Erisa, in the GE pension plan could be pushed further into the future, "potentially significantly beyond the currently guided pre-funding to 2023," with other conditions remaining the same.
In addition, the analyst said, every 0.25 percentage point increase in the discount raised used to value future payments reduces pension obligations by about $2.4 billion.
"Our pension model shows that GE Industrial net debt contribution from unfunded pension liabilities should come down by about $3 billion in '21," he said.
GE's pension obligations "are clearly an overhang" to its balance sheet, free cash flow and ultimately, sentiment, Mittermaier said.
He added that "hence, it is no surprise that GE has started to derisk pensions," including the freezing of defined benefit plans, lump-sum settlements, prefunding, and buyouts.
The analyst said removing the pension overhang would be "good optics" and would boost investor sentiment.
Mittermaier estimated that a complete settlement of the defined pension liability would boost free cash flow by $300 million and add 12 cents to earnings per share in the first year.
Earlier this month, GE posted weaker-than-expected fourth-quarter earnings, but forecast solid industrial free cash flow growth for the coming year.
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March 04, 2021 at 03:14AM
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