General Electric (NYSE: GE) recently reported its Q3 results, with revenues and earnings beating our estimates. Although GE stock is trading at 1.5x sales, higher than its last five-year average of 0.8x, we believe it will likely see higher levels with strong aviation growth, balance sheet improvement, and Vernova spinoff. We discuss more in the sections below.
General Electric reported revenue of $17.3 billion, reflecting 20% growth from the prior year period and above our estimate of $15.8 billion. Its adjusted earnings of $0.82 per share were also above our estimated $0.58 figure. In this note, we discuss General Electric’s stock performance, key takeaways from its recent results, and valuation.
GE stock has seen extremely strong gains of 70% from levels of $65 in early January 2021 to around $110 now, vs. an increase of about 10% for the S&P 500 over this roughly 3-year period. However, the increase in GE stock has been far from consistent. Returns for the stock were 10% in 2021, -11% in 2022, and 66% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 8% in 2023 (YTD) – indicating that GE underperformed the S&P in 2021.
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In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector, including CAT, UNP, and UPS, and even for the megacap stars GOOG, TSLA, and MSFT.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could GE face a similar situation as it did in 2021 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, GE stock looks like it has more room for growth. We estimate General Electric’s Valuation to be $124 per share, reflecting around 14% upside from its current levels of $109. Our forecast is based on a 48x P/E multiple for GE and expected earnings of $2.59 on a per-share and adjusted basis for the full year 2023. The company raised its earnings outlook to now be in the range of $2.55 and $2.65 (vs. the $2.10 and $2.30 range earlier).
General Electric’s revenue of $17.3 billion was up 20% y-o-y, driven by the Aerospace segment, rising 25%. Renewable Energy sales were up 15%, and Power was up 13%. The company plans to separate its renewable energy and power business into a separate entity – GE Vernova – by Q2 2024. The company saw its adjusted profit margin expand 720 bps y-o-y to 9.8% in Q3, vs. 2.6% in the year-ago period. Higher revenues and margin expansion resulted in solid earnings of $0.82 on a per-share and adjusted basis, compared to a loss of $0.17 per share in the prior year period. General Electric has been focused on reducing its debt. Its current debt of around $21 billion compares with a significant $94 billion figure in 2019. The company has sold several of its assets to reduce its debt. A strong demand outlook, especially for its aviation business, clubbed with improving margins, should bolster the company’s stock price growth.
While GE stock looks like it has more room for growth, 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.
|S&P 500 Return||-3%||8%||85%|
|Trefis Reinforced Value Portfolio||-5%||17%||501%|
 Month-to-date and year-to-date as of 10/27/2023
 Cumulative total returns since the end of 2016