Down 20% This Year Is RTX Stock A Better Pick Than General Electric?

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General Electric

Given its better prospects, we believe RTX Corp stock (NYSE: RTX) is a better pick than its sector peer, General Electric stock (NYSE: GE). Although both stocks trade at a similar valuation multiple of around 1.6x revenues, RTX has seen better revenue growth and superior profitability in recent years. We think RTX stock deserves a slightly higher valuation multiple compared to GE. In the sections below, we discuss why we believe that RTX will offer better returns than General Electric in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation, in an interactive dashboard analysis of General Electric vs. RTX CorpWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

GE stock has seen extremely strong gains of 85% from levels of $65 in early January 2021 to around $120 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. On the other hand, RTX stock has witnessed gains of 15% from levels of $70 in early January 2021 to around $80 now.

However, the increase in GE stock has been far from consistent. Returns for the stock were 10% in 2021, -11% in 2022, and 83% in 2023 (YTD), while returns for RTX stock were 23% in 2021, 19% in 2022, and -21% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% in 2023 (YTD) – indicating that GE underperformed the S&P in 2021 and RTX underperformed the S&P in 2021 and 2023.

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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 UNP, BA, 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 and RTX face a similar situation as they did in 2021 and underperform the S&P over the next 12 months – or will they see a strong jump? We believe RTX will fare better between the two.

1. RTX Corp’s Revenue Growth Is Better

  • RTX Corp’s revenue growth has been better, with a 14.2% average annual growth rate in the last three years, while General Electric’s revenue declined at an average rate of 5.0% over this period.
  • 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 were 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 before recovering to $26.0 billion in 2022.
  • Looking at the latest quarter, General Electric’s Q3’23 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. It split its healthcare business earlier this year. The company’s focus on expanding its aerospace business and strengthening its balance sheet has been the key growth driver for GE stock in the recent past.
  • Looking forward, with a rise in travel demand and Boeing focusing on increasing its production rate, General Electric will likely see higher aerospace sales.
  • RTX Corp’s commercial airplane business was hit during the pandemic, weighing on its commercial OEM and aftermarket sales. This trend has now reversed, with both Pratt & Whitney and Collins Aerospace Systems segments driving the company’s sales growth in the recent past.
  • However, RTX stock has been under pressure this year due to its recall of over 1,000 Pratt & Whitney engines and associated costs.

2. RTX Corp Is More Profitable 

  • RTX Corp’s operating margin fell from 12.7% in 2019 to 10.9% in 2022, while General Electric’s operating margin expanded from -2.8% to 0.2% over this period.
  • Looking at the last twelve-month period, RTX Corp’s operating margin of 7.4% fares better than 2.8% for General Electric.
  • General Electric has seen its margin expand in the recent past, a trend expected to continue. The company saw its adjusted profit margin expand 720 bps y-o-y to 9.8% in Q3’23, vs. 2.6% in the year-ago period.
  • Our General Electric Operating Income Comparison and RTX Corp Operating Income Comparison dashboards have more details.
  • Looking at financial risk, GE Fares better. While RTX’s 31% debt as a percentage of equity is higher than 16% for General Electric, the latter’s 8% cash as a percentage of assets is higher than 3% for RTX. This means that General Electric has a better debt position and more cash cushion.
  • With GE stock rising over 80% this year, its market capitalization has expanded, and its focus on reducing its debt has resulted in a better debt-to-equity ratio. Its current debt of around $21 billion compares with $26 billion at the beginning of the year and a significant $94 billion figure in 2019.

3. The Net of It All

  • We see that RTX Corp has seen better revenue growth and is more profitable. On the other hand, General Electric has a better financial position.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe RTX is the better choice of the two.
  • Looking at valuation multiples, RTX fares better. General Electric is currently trading at 1.6x trailing revenues, vs. the last five-year average of 0.8x. In contrast, RTX Corp is trading at 1.7x revenues, compared to its last five-year average of 2.3x.
  • Our General Electric (GE) Valuation Ratios Comparison and RTX Corp (RTX) Valuation Ratios Comparison have more details.
  • Overall, we believe that investors can use the current dip in RTX Corp, owing to the engine recall issue, as an opportunity for better valuations  in the long run. While GE stock is also expected to do well in the near term, we think RTX will offer better returns in the next three years, based on Trefis Machine Learning analysis – General Electric vs. RTX Corp – which also provides more details on how we arrive at the returns.

While RTX stock may outperform GE, 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.

Returns Nov 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 GE Return 10% 83% -32%
 RTX Return -2% -21% 33%
 S&P 500 Return 9% 19% 104%
 Trefis Reinforced Value Portfolio 8% 27% 551%

[1] Month-to-date and year-to-date as of 11/24/2023
[2] Cumulative total returns since the end of 2016

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