The company we all once knew as “General Electric” has undergone massive changes over the past couple of years. Turn first GE Health and then GE Vernova (its energy business), what emerged earlier this year from the chrysalis is a new, reinvented “GE” known as GE Aerospace(NYSE:GE)specialist in manufacturing aircraft engines for commercial aerospace giants like Boeing And Airbusand also for the American army.
Start your mornings smarter! Wake up with Breakfast News in your mailbox every market day. Register for free »
What are the prospects for this new society? Read on and find out what GE Aerospace is today, what its plans are for the future – and what Wall Street thinks of those plans.
Once upon a time, General Electric was a diversified industrial conglomerate, producing products as diverse as light bulbs and washing machines, power plants and medical imaging devices…and airplane engines. Today, GE Aerospace essentially does the latter thing.
GE reported third quarter result in October. Sales growth was lackluster, with revenue up 6% year-over-year. But several figures give investors reason to hope for an imminent improvement in growth, first and foremost in profit margins. A year ago, GE's aerospace business had an operating profit margin of 18.8% on sales. In the third quarter of 2024, this figure increased to 20.3%.
Growth in new orders was also encouraging. GE recorded $12.6 billion in orders during the quarter, up 28% from last year, pointing to potentially huge sales growth in the coming quarters. And supporting that view, CEO Larry Culp raised the company's earnings forecast for the remainder of this year.
By the end of 2024, it now expects adjusted earnings above $4.20 per share and free cash flow (FCF) above $5.6 billion (about 12% ahead of previous forecasts).
The good news doesn't stop there. In a presentation to investors in March, GE outlined its financial objectives through 2028. All are based on the gradual “normalization” of the financial situation. plane travel and demand for aircraft (and aircraft engines), leading to growth in “robust commercial aerospace” worldwide.
What does that mean in dollars and cents? Beginning in 2025, management expects low double-digit sales growth leading to operating profits of $7.1 billion or more, with free cash flow equal to or greater than net income after taxes. Then, over the next three years, management hopes to achieve a milestone: achievable, single-digit sales growth, leading to consistently higher operating profits.
By 2028, GE expects pretax earnings of $10 billion or more per year, with FCF continuing to match or exceed reported net income.
Are these projections realistic? Wall Street thinks so – in fact, analysts polled by S&P Global Market Intelligence seem to think that some numbers might be conservative.
For example, in 2025 alone, analysts estimate that GE's operating profit will not be $7.1 billion, but $7.3 billion. Their FCF forecast, admittedly, only calls for $5.6 billion in cash profit – but that could mean GE could be in for a positive surprise if it hits its numbers next year.
By 2028, Wall Street projects total sales growth of 29%, generating $10.8 billion in operating profit and $8.5 billion in positive free cash flow. Notably, if GE achieves this goal, it will mean that the company will have managed to more than double its FCF over the five-year period from 2023 to 2028.
As of Friday's close, GE Aerospace stock had a market capitalization of $190 billion. However, based on current year earnings, it's not exactly cheap, resulting in a price-to-earnings (P/E) ratio of around 35. But if GE's stock grows too as fast as it promises – and as fast as analysts say it will grow – could that be enough to justify buying shares anyway?
As much as I'd like to say “of course I do”, I'm not so sure.
Even if everything goes well and GE meets analyst forecasts, $190 billion in current market cap divided by $8.5 billion in free cash flow. supposed generating in four years gives a price-to-FCF (P/FCF) ratio of over 22. (And remember, this is a multiple based on earnings the company won't make for another four years – and could in fact not earn.)
Perhaps that valuation would be justifiable if GE continues to grow at a rate of around 20% four years from now, but neither the company nor analysts predict that. Instead, they expect steady FCF growth of 10% in 2028 – a respectable number, but not enough to justify a P/FCF ratio of 22, in my opinion.
All things considered, the 70%-plus gains GE shares have made this year could last for a while. At current prices, the stock is unlikely to rise further from here.
Have you ever felt like you missed the boat by buying the best performing stocks? Then you will want to hear this.
On rare occasions, our team of expert analysts issues a “Doubled” actions recommendation for businesses that they believe are on the verge of collapse. If you're worried that you've already missed your chance to invest, now is the best time to buy before it's too late. And the numbers speak for themselves:
Nvidia:If you invested $1,000 when we doubled down in 2009,you would have $376,143!*
Apple: If you invested $1,000 when we doubled down in 2008, you would have $46,028!*
Netflix: If you invested $1,000 when we doubled down in 2004, you would have $494,999!*
Right now, we're issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool ranks and recommends GE HealthCare Technologies. The Motley Fool recommends GE Aerospace. The Mad Motley has a disclosure policy.
