Pick Either General Electric Stock Or Its Sector Peer – Both May Offer Similar Returns

We believe that industrial companies General Electric stock (NYSE: GE) and 3M stock (NYSE: MMM) will likely offer similar returns over the next three years. Although General Electric is trading at a comparatively lower valuation of 1.0x trailing revenues vs. 1.8x for 3M, this gap in the valuation is justified given 3M’s superior revenue growth and profitability, as discussed below.

If we look at stock returns, GE, with -33% returns this year, has fared slightly better than the -39% return for MMM stock, while both have underperformed the broader S&P 500 index, down 25%. There is more to the comparison, and in the sections below, we discuss the possible stock returns for GE and MMM 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. 3M: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. 3M’s Revenue Growth Is Better

• 3M’s revenue growth of 0.5% 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 3M saw its sales rise at an average growth rate of 2.7% to $35.4 billion in 2021, compared to $32.8 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.
• 3M’s revenue growth over the recent years was driven by high demand for safety and personal protective equipment, while sales for some of its other products, including office products, were hit during the pandemic due to many offices being shut, given the lockdowns and shelter-in-place restrictions, resulting in lower demand. The demand for transportation products was also down due to the lower production of cars amid semiconductor chip shortages.
• However, this trend has now reversed. 3M is facing a decline in demand for safety and protective gear, while its consumer business, including home improvement, is seeing a pickup in demand post-pandemic.
• Our General Electric Revenue and 3M Revenue dashboards provide more insight into the companies’ sales.
• Looking forward, both General Electric and 3M 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. 3M Is More Profitable

• General Electric’s operating margin of -6% over the last twelve months is far worse than 19% for 3M.
• This compares with -3% and 19% figures seen in 2019, before the pandemic, respectively.
• 3M’s free cash flow margin of 19% is also better than the 6% for General Electric.
• Our General Electric Operating Income and 3M Operating Income dashboards have more details.
• Looking at financial risk, 3M trumps GE. 3M’s 31% debt as a percentage of equity is lower than 57% for GE, while its 10% cash as a percentage of assets is higher than 8% for the latter, implying that 3M has a better debt position and more cash cushion.

3. The Net of It All

• We see that the revenue growth and profitability have been better for 3M, and it also offers lower financial risk than GE. However, GE is trading at a comparatively 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 GE and MMM are likely to offer similar returns over the next few 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 20% for GE over this period and a 17% expected return for MMM stock, implying that investors can choose either of the two or both if they are looking to invest in the industrial sector, based on Trefis Machine Learning analysis – General Electric vs. 3M – which also provides more details on how we arrive at these numbers.

While GE and MMM 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.

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