General Electric: Bringing Good Things to Investors’ Lives

Key Points

• General Electric significantly outperformed its Q3 results and confirmed the uptrend in stock prices. 
• The split of GE Aerospace and GE Vernova is on track for Q2 F2024. 
• A large dividend increase is on deck, and capital returns include debt reduction and share repurchases. 

General Electric NYSE: GE is the poster child for big, blue-chip conglomerates that grew too big, were forced to split, and rose like a phoenix to new life. The company is not completely out of the woods, but the efforts to turn it around are paying off. 

The takeaway is that the Q3 results and guidance were strong, strong enough to lift shares more than 5% and help confirm an uptrend in the market. Based on the new data and the market activity, it looks like GE shares will continue to trend higher and set new highs in 2024, if not before. 

Among the drivers of value for GE shareholders is the impending split of GE Aerospace and GE Vernova. GE Aerospace will be a stand-alone aerospace company focused on engines and aerospace systems, while GE Vernova is the electrical power generation and control business. Both business segments show momentum today; the split is targeted for the start of Q2 F2024.  

General Electric has an Energizing Quarter, Guides Higher 

General Electric had a smashing quarter with total revenue of $17.3 billion, up 19.6% and organic revenue up 18%. Both figures outpaced the analyst consensus by a wide margin, 1000 basis points on an as-reported basis, and margin strength is also present. 

Segmentally, GE Aerospace led with double-digit growth in all key metrics. Revenue is up 25%, with orders up 34%, suggesting momentum is building. Growth in this segment is driven by commercial and military demand. GE Vernova grew by a lesser amount, with its sub-segments advancing 14% and 9%, led by Renewable Energy. The critical detail in this segment is that both sub-segments are growing, widening margins, and producing profits. 

The company also reported margin strength driven by leverage and the impact of turnaround efforts. The company-wide GAAP profit margin increased by 320 basis points, adjusted by 760, to reverse operating losses posted in the prior year. Bottom line results came in at $0.82 adjusted and $0.26 better than expected to outpace the top-line strength significantly. 

Guidance suggests the strength is not a 1-off event. The company raised the full-year guidance for revenue and earnings to reflect the Q3 strength but may still be cautious. The company expects revenue growth in the low teens compared to low double digits and, for a minimum, $2.55 in EPS compared to the expected $2.36. 

General Electric is A Better Value than it May Look 

General Electric is performing well, but it comes with a high valuation, at least compared to this year’s earnings guidance. The low end of $2.55 has the stock trading above 40X earnings, but the valuation falls drastically compared to next year. Analysts forecast 80% earnings growth in 2024, enough to bring the value back to more reasonable levels. 

Next year’s earnings outlook raises the question of dividend increases. The stock pays a meager 0.3% yield at current levels but has the capacity today to increase the payment. The payout ratio is less than 12% of earnings and comes with a solid and strengthening balance sheet. The balance sheet was simplified and strengthened in Q3 by redeeming its remaining preferred shares for $2.8 billion, which helped free up future cash flow. The company raised the dividend by 30% at the end of last fiscal year; another solid double-digit increase could also be on deck this year. 

The Technical Outlook: General Electric Confirms Trend 

The price action in General Electric confirmed its uptrend following the Q3 release. Action is up more than 5% in premarket trading, confirming support at the 150-day EMA. The move has yet to be confirmed by the indicators. Still, MACD and stochastic are consistent with an emerging trend-following signal showing a profoundly oversold market trading above and confirming support with an established uptrend. Assuming the market follows through on this signal, the stock could advance to retest the recent highs and possibly move to new highs before the end of the year.