Source: PaxForex Premium Analytics Portal, Fundamental Insight
General Electric's (GE) stock has shown remarkable growth over the past year, surging by more than 80%, and there are compelling reasons to believe this upward trend could persist. The company recently not only raised its full-year revenue and earnings forecast but also adjusted its projections for two significant segments: GE Aerospace and GE Vernova (a combination of GE Power and GE Renewable Energy, set to be spun off in early 2024).
Additionally, there are positive indicators from each of these business divisions that suggest a brighter future ahead.
General Electric (GE) has revised its guidance, marking a significant shift from the beginning of the year when they expected high-single-digit percentage revenue growth and free cash flow (FCF) ranging between $3.4 billion and $4.2 billion for 2023. Over the course of the year, management consistently raised their earnings and FCF forecasts. As a result, the latest estimates now anticipate low-teen revenue growth and FCF ranging from $4.7 billion to $5.1 billion.
While this may put GE's year-end price-to-FCF multiple slightly above 24, it's important to note that both GE Aerospace and GE Vernova are on the cusp of substantial growth. Here are two pivotal reasons for this optimism:
GE Aerospace
Within GE Aerospace, the crucial metric to watch is the spares rate, representing the value of "commercial externally shipped spare parts and spare parts used in time and material shop visits in millions of dollars per day." This metric serves as an indicator of the aerospace segment's profitability.
The profit margins in GE Aerospace can be volatile due to the fact that jet airplane engines are typically sold at a loss, with profits generated from services and aftermarket sales over the engines' operational lifespans. Therefore, the spares rate offers valuable insights into the trajectory of this business.
Encouragingly, recent data shows a significant uptick in the spares rate, rising from $29.4 million per day in the third quarter of 2022 to $32.6 million per day in the second quarter of 2023, and a noteworthy $42.4 million per day in the third quarter of 2023.
Questions have naturally arisen regarding the sustainability of this growth, prompting Chief Financial Officer Rahul Ghai to outline three factors supporting this positive trend:
Volume growth driven by the increasing number of flight departures.
Pricing increases that have been applied across the last two months of the quarter, expected to benefit the fourth quarter as well.
Expansion of work scope on wide-body aircraft and the broadening of work scope on narrow-body aircraft by airlines.
Ghai expects spare-parts revenue to achieve "mid-20s growth in the fourth quarter" and foresees strong potential for GE Aerospace to continue its revenue and spares rate growth in 2024 as flight departures continue to rise.
GE Vernova
GE Vernova encompasses three distinct businesses: onshore wind, grid-solutions equipment and services, and offshore wind. While the offshore wind sector faces challenges, with expected losses in 2023 and 2024 totaling $1 billion each year as the company manages a $6 billion backlog with financial difficulties, there's positive news from the onshore wind and grid solutions segments. CEO Larry Culp anticipates improved performance, driven by robust order growth and enhanced execution.
In the last quarter, grid orders experienced a remarkable 50% year-over-year increase, while North American onshore equipment orders surged by 40%, thanks to GE's renewed focus on the domestic market. Furthermore, GE is making substantial progress in enhancing profit margins within its backlog for grid and onshore wind, with the grid backlog profit margin rising by 300 basis points and the onshore wind backlog profit margin increasing by 700 basis points in the quarter.
In conclusion, the outlook for General Electric appears promising. GE Aerospace is positioned for a sustained recovery, with the expectation of operating profit increasing from $6 billion to a range of $7.6 billion to $8 billion by 2025. Simultaneously, GE Vernova is poised to navigate its offshore wind challenges while capitalizing on the growing profitability of its backlog in onshore wind and grid solutions, ultimately moving toward profitability.
As long as the price is above 106.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 108.64
- Take Profit 1: 113.00
- Take Profit 2: 117.00
Alternative scenario:
If the level of 106.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 106.00
- Take Profit 1: 102.00
- Take Profit 2: 99.00
