General Electric eyes a transformation as an aviation pure play. The latest GE earnings underscored strength in its jet-engine business though supply issues persist, as the big GE breakup looms. Is GE stock a buy as it rallies near a key technical level?
GE News
In Q3, GE earnings tumbled 39%, the industrial giant said Oct. 25. Weakness in its renewable energy business offset strength in aviation.
"Aviation results suggest end market in midst of upswing, boding well for the commercial aero recovery," RBC Capital Markets analyst Deane Dray wrote in an Oct. 25 note to clients. "Strong demand for engine deliveries, shop visits, and spare parts are driving robust growth into 2023."
General Electric will emerge as an aviation company in early 2024, after spinning off its health care, power and renewable energy businesses.
The new GE will focus on making jet engines and aviation systems. Its commercial, military and business customers include Boeing and Airbus. The aviation business is sometimes called the "crown jewel" in GE's portfolio.
Boeing delivered a surprise Q3 loss, with challenges in its defense unit offsetting commercial gains.
Industrial companies are grappling with supply-chain issues and macro uncertainties. Besides supply disruptions, headwinds include the rapid rise in inflation, a Covid resurgence in parts of China, and the Russia-Ukraine war.
GE Stock Technical Analysis
Shares of General Electric fell 0.5% Oct. 25 after its Q3 report, but have rallied since. They now eye a nearly 6% weekly gain, above 77. GE stock is closing upon the 40-week line after regaining the 10-week moving average ahead of quarterly earnings. But it remains more than 33% off its 52-week high.
General Electric shares last broke out in November 2021 on news of GE's three-way split. The breakout quickly fizzled. If GE stock rallies around 80, it might be actionable again. There's no buy point for now.
The relative strength line for GE stock is rising within a longer-term downtrend, according to MarketSmith charts. The RS line rallied for parts of 2020 and 2021 on hopes for GE's turnaround. A rising RS line means that a stock is outperforming the S&P 500. It is the blue line in the chart shown.
The industrial giant earns a IBD Composite Rating of 40 out of 99. The rating combines key technical and fundamental metrics in a single score.
General Electric owns an RS Rating of 61, meaning it has outperformed 61% of all stocks over the past year. The Accumulation/Distribution Rating is a B-, on a scale of A+ to a worst E. It's a sign of roughly equal buying and selling of GE shares by big institutions over the past 13 weeks.
GE remains a popular stock with strong institutional support. As of September, 1,851 funds owned shares. GE stock shows zero quarters of rising fund ownership, according to the IBD Stock Checkup tool.
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GE Earnings And Fundamental Analysis
On key earnings and sales metrics, GE stock earns an EPS Rating of 42 out of a best-possible 99, and an SMR Rating of D, on a scale of A+ (best) to E (worst). The EPS Rating compares a company's earnings per share growth vs. all other companies, and its SMR Rating reflects sales growth, profit margins and return on equity.
In Q3, General Electric earnings tumbled 39% to 35 cents a share, the company disclosed Oct 25. Revenue grew 2.8%, led by its aviation unit.
GE generated $1.189 billion in free cash flow (FCF), well ahead of views. But it lowered earnings and FCF outlook for the year.
The company reported continued recovery in its flagship aviation business and improvement in health care, but its energy businesses lagged. Revenue rose 24% in aviation and 6% in health care. It fell 31% in power and renewable energy posted a loss.
The FCF measure is closely watched as a sign of the health of GE's operations. It fell 66% in 2020 but rebounded 857% in 2021, according to FactSet.
In all of 2022, analysts now forecast GE earnings will jump 50% per share on roughly flat sales. They expect GE earnings to rise a further 71% in 2023 as revenue grows 9%. But they expect General Electric to surpass 2019 EPS of $5.20 only in 2024, FactSet says.
Out of 22 analysts on Wall Street, 14 rate GE stock a buy. Eight have a hold and no one has a sell.
Big GE Breakup
In 2024, GE will emerge as an aviation-focused company after a three-way breakup. The American industrial icon plans to spin off its lower-growth health and energy businesses to focus on aviation.
The three-way GE split caps years of dwindling profits and a costly restructuring. It closes a key chapter in General Electric's 129-year-old history, with roots going back to Thomas Edison.
In July, the company named the three public companies set to emerge in 2023-24: GE Aviation, GE HealthCare and GE Vernova (housing its power and renewable energy businesses).
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GE Aviation
Aviation — GE's "crown jewel" — makes jet engines for plane makers including Boeing and Airbus. GE Aviation also runs a lucrative aftermarket business for engine repair and maintenance.
In 2020, Boeing halted production of the 737 Max jet for a few months after two fatal flights, which weighed on Leap engine sales. On top of that, airlines parked planes and delayed or canceled orders due to the pandemic. Engine shop visits slowed while leasing customers sought short-term deferrals. As a result, GE Aviation slashed jobs by 25% and later warned of more cuts.
Many of those headwinds continue to lift. Airlines say both international and corporate air travel demand is improving.
Meanwhile, the market continues to shift from widebody jets to longer-range, narrow-body aircraft, benefiting General Electric. A GE joint venture dominates the market for narrow-body jet engines.
During the pandemic, travel restrictions to halt the spread of Covid-19 negatively affected aircraft deliveries and orders.
Aerospace suppliers also struggled to deliver parts and equipment on time, due to pandemic-fueled shortages of semiconductor chips and plastics. Costs of aluminum and steel also rose. Supply disruptions from the Russia-Ukraine war and the rapid rise in inflation are newer challenges.
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GE Restructuring
In October 2019, a year after taking the reins, CEO Culp said his top priority is improving General Electric's financial position, while strengthening GE's industrial businesses, which include making jet engines, gas turbines, wind turbines and hospital equipment.
In 2017, GE began a vast and costly restructuring. Poorly timed acquisitions and some execution missteps caused debt to balloon and GE earnings and cash to crumble.
It has since seen recovery or stabilization in key business segments, including aviation.
Meanwhile, General Electric settled certain SEC investigations, while slashing billions in costs and debts. Those moves helped to remove legal and financial overhangs, de-risking GE stock.
Now GE stock bears a 32-cent annual dividend payout, yielding 0.4%
In 2017 and 2018, a cash-challenged General Electric had slashed its quarterly dividend. The cuts rattled investors, who prized GE stock for its long and reliable history of paying dividends.
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Rivals To General Electric
Rivals to General Electric include Raytheon Technologies and Siemens Energy.
Raytheon and Rolls-Royce of Britain are major jet-engine rivals. Siemens Energy competes with GE in power. It emerged after Siemens spun off its low-margin gas turbine business. Japan's Mitsubishi Hitachi is another big power rival.
The diversified operations group ranks No. 158 out of 197 industry groups tracked by IBD. It includes 3M, Honeywell and Roper Technologies.
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Is GE Stock A Buy Now?
General Electric continues its long, ambitious turnaround. GE earnings are expected to grow in 2022 and 2023, as airlines and the broader economy continue to recover from the pandemic.
Moreover, General Electric's poised for a huge transformation, shedding its diversified past to emerge as an aviation-focused business.
But GE belongs to a lagging industry group. A fresh Covid resurgence in China, which has a "zero-Covid" policy, could mean more supply disruptions and significant restrictions there.
The Russia-Ukraine war adds to business uncertainty.
More broadly, recession fears are growing in the U.S. and Europe, as rate hikes to control inflation weigh on global economies.
For a cyclical industrial giant like General Electric, these are challenging headwinds.
Many analysts on Wall Street are bullish about GE's current leadership and improving fundamentals. But others remain on the sidelines.
From a technical perspective, GE stock is rally as earnings show momentum in the key aviation business. Share are above the 10-week average but below longer-term levels, and well off highs. It has further to recover before a buy point can emerge.
Bottom line: GE stock is not a buy.
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