Pick Either General Electric Stock Or Its Sector Peer – Both Are Likely To Offer Similar Returns

We believe that industrial companies General Electric stock (NYSE: GE) and Raytheon Technologies stock (NYSE: RTX) will likely offer similar returns over the next three years. Although GE is trading at a comparatively lower valuation of 1.0x, trailing revenues vs. 1.9x for RTX, this gap in the valuation is justified given Raytheon’s superior revenue growth and profitability, as discussed below.

If we look at stock returns, Raytheon, with 1% returns this year, has fared much better than the -30% return for General Electric stock and -20% returns for the broader S&P 500 index. There is more to the comparison, and in the sections below, we discuss the possible stock returns for GE and RTX in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of General Electric vs. Raytheon Technologies: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Raytheon’s Revenue Growth Is Better

• Raytheon’s revenue growth of 4.8% over the last twelve months is better than a 1.1% fall in General Electric’s sales.
• Looking at a longer time frame, General Electric sales declined at an average rate of 8.4% to $74.2 billion in 2021, compared to $97.0 billion in 2018, while Raytheon saw its sales rise at an average growth rate of 23.1% to $64.4 billion in 2021, compared to $34.7 billion in 2018.
• The revenue decline for General Electric can primarily be attributed to the impact of the Covid-19 pandemic on the company’s businesses, especially Aviation, given that commercial airlines was one of the worst-hit sectors during the coronavirus crisis.
• For perspective, Aerospace segment sales plunged 33% to $22.0 billion in 2020, compared to $32.9 billion in 2019, before the pandemic. The segment revenues declined further to $21.3 billion in 2021.
• However, with a rise in travel demand and Boeing focusing on increasing its production rate, 2022 has fared better for General Electric, with Aerospace revenues rising 19% to $11.7 billion in the first half of the year.
• It should be noted that GE plans to split into three companies focused on Aerospace, Healthcare, and Energy. The Healthcare business is expected to split in 2023 and Energy in 2024, leaving the Aerospace business with GE. This move has largely been seen as a positive for the company, unlocking more value for shareholders, implying that GE stock may see some volatility over the next couple of years.
• Raytheon has undergone significant restructuring over recent years. United Technologies merged with Raytheon to form Raytheon Technologies in 2020. Furthermore, it spun off its OTIS and Carrier businesses, making Raytheon purely an aerospace and defense-focused company.
• Raytheon’s commercial airplane business was also hit during the pandemic weighing on its commercial OEM and aftermarket sales.
• However, there are near-term headwinds for both companies. The current high inflationary environment, rising interest rates, supply chain disruptions, and fears of a slowing economy have weighed on the broader markets.
• Our General Electric Revenue and Raytheon Technologies Revenue dashboards provide more insight into the companies’ sales.
• Looking forward, both General Electric and Raytheon Technologies are expected to grow at a similar pace over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years and points to a CAGR of 1.6% for both of them, based on Trefis Machine Learning analysis.
• Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.

2. Raytheon Is More Profitable

• General Electric’s operating margin of -6.0% over the last twelve months is far worse than 11.7% for Raytheon.
• This compares with -2.8% and 16.2% figures seen in 2019, before the pandemic, respectively.
• Raytheon’s free cash flow margin of 10.5% is also better than the 5.8% for General Electric.
• Our General Electric Operating Income and Raytheon Technologies Operating Income dashboards have more details.
• Looking at financial risk, both are comparable. General Electric’s 55.0% debt as a percentage of equity is much higher than 24.9% for Raytheon, while its 8.3% cash as a percentage of assets is higher than 3.0% for the latter, implying that Raytheon has a better debt position, but General Electric has more cash cushion.

3. The Net of It All

• We see that Raytheon has demonstrated better revenue growth, is more profitable, and has a better debt position. On the other hand, General Electric has more cash cushion and is available at a relatively lower valuation.
• Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe both General Electric and Raytheon Technologies are likely to offer similar returns over the next three years.
• The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 19% for General Electric over this period and a 15% expected return for Raytheon Technologies, implying that investors can pick either of the two for similar returns, based on Trefis Machine Learning analysis – General Electric vs. Raytheon Technologies – which also provides more details on how we arrive at these numbers.

While GE and RTX stocks are likely to offer similar returns, it is helpful to see how General Electric’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Novanta vs. Abbott.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

[1] Month-to-date and year-to-date as of 9/21/2022
[2] Cumulative total returns since the end of 2016

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