Shares of General Electric (GE) have crushed the broader markets this year, rising over 73% in 2023. Valued at a market cap of $122 billion, GE stock has surged more than 88% in the last 12 months - though it's still well below the all-time highs reached back in 2000, when the company was valued over $600 billion.
Despite its recent gains, the large-cap stock has trailed the broader markets by a wide margin over the long term. After adjusting for dividends, GE stock has returned 28% since August 2003. Comparatively, the S&P 500 Index ($SPX) has returned 571% to shareholders in the last two decades.
In light of the recent outperformance, let’s see if you should buy General Electric stock at its current valuation.
Is General Electric stock a Buy, Sell, or Hold?
General Electric is a diversified industrial heavyweight engaged in providing commercial and military aircraft engines and systems, renewable energy generation equipment, grid solutions, gas, steam, and nuclear power generation equipment.
Its subsidiaries include Aerospace, Healthcare, Capital, and Renewable Energy. Similar to the recent GE Healthcare (GEHC) spin-off, the company’s renewable energy and power business will be spun off in 2024 and will be known as GE Vernova.
In Q2 of 2023, General Electric reported another quarter of double-digit growth in orders, revenue, and operating profit, driven by services and robust market demand across verticals. GE's Aerospace business was a particular strong point, and GE Vernova booked record orders and improving profit margins in the renewable energy segment.
Specifically, revenue for the period increased 19% to $15.9 billion, while adjusted earnings almost doubled to $0.68 per share, compared to $0.36 per share in the year-ago period. After GE's solid Q2 results, management raised its full-year outlook for sales, earnings, and cash flows. In the first two quarters of 2023, GE's earnings have already surpassed its full-year 2022 results, where it reported earnings of $2.35 per share.
What next for GE stock in 2023?
Supply chain disruptions impacted the Aerospace business amid the COVID-19 pandemic. But GE has since overcome these headwinds, and expects to deliver 1,700 LEAP engines to Airbus (AIR.FP) and Boeing (BA), ramping up production at an accelerated pace.
During the earnings call, GE CEO Larry Culp explained, “Defense improved this quarter, delivering significant growth. Orders more than doubled. Engine output increased with units up over 70% year-over-year.”
GE Aerospace is now forecast to contribute between $5.6 billion and $5.9 billion towards operating profits in 2023, up from the prior guidance of $5.3 billion to $5.7 billion.
Elsewhere, sales fell 1% at GE's Power segment - but due to stellar growth in the higher-margin services business, its profits were up 18% year over year. According to Culp, renewable sales should grow by high-single digits this year, compared to its earlier forecast of mid-single-digit growth.
What is the target price for General Electric stock?
Analysts tracking GE stock expect the company to end 2023 with a free cash flow of $4.3 billion in 2024. Moreover, free cash flow is on track to grow by 45% to $6.3 billion in 2024. So, GE stock is priced at 19.8 times 2024 free cash flow, which is not unreasonable if its business turnaround is successful.
Out of the 15 analysts covering GE stock, eight recommend a “strong buy,” two recommend a “moderate buy,” and five recommend a “hold.” The average target price for GE stock is $123.07, which is only about 8% higher than the current trading price.
The upcoming spin-off of GE Vernova might make investors nervous, as the demand for clean energy solutions will remain robust over the next three decades. But aircraft production numbers could soon touch all-time highs, which will significantly drive GE’s Aerospace business. These trends should also support continued growth in the high-margin services business for General Electric, suggesting there's still more upside ahead.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
