Choose either General Electric stock or its industry counterpart – both are likely to offer similar returns
We believe that industrial companies General Electric Stocks (NYSE: GE) and Raytheon Technologies Stock (NYSE: RTX) will likely offer similar returns over the next three years. Although GE is trading at a comparatively lower valuation of 1.0x, trailing revenue versus 1.9x for RTX, this discrepancy in valuation is justified given Raytheon’s superior revenue growth and profitability, as shown. below.
Looking at stock returns, Raytheon, with 1% returns this year, has fared much better than General Electric’s -30% return.
: Which stock is a better bet? Parts of the analysis are summarized below.
1. Raytheon revenue growth is better
- Raytheon’s revenue growth of 4.8% over the last twelve months is better than a 1.1% drop in sales at General Electric.
- Over a longer period, General Electric’s sales declined at an average rate of 8.4% to $74.2 billion in 2021 from $97.0 billion in 2018, while Raytheon saw sales increase at an average growth rate of 23.1% to reach $64.4 billion in 2021. , from $34.7 billion in 2018.
- General Electric’s decline in revenue can primarily be attributed to the impact of the Covid-19 pandemic on the company’s business, particularly aviation, as commercial airlines have been one of the sectors most affected during the coronavirus crisis.
- As a reminder, sales in the Aerospace segment plunged 33% to $22.0 billion in 2020, from $32.9 billion in 2019, before the pandemic. Segment revenue declined further to $21.3 billion in 2021.
- However, with an increase in travel demand and Boeing
focusing on increasing its production rate, 2022 fared better for General Electric, with aerospace revenue up 19% to $11.7 billion in the first half.
- It should be noted that GE plans to split into three companies focused on aerospace, healthcare and energy. The Healthcare business is expected to split in 2023 and the Energy business in 2024, leaving the Aerospace business to GE. The move was widely viewed as a positive for the company, unlocking more value for shareholders, implying that GE shares could experience some volatility over the next couple of years.
- Raytheon has undergone significant restructuring over the past few years. United Technologies
merged with Raytheon to form Raytheon Technologies in 2020. Additionally, it separated its OTIS and Carrier businesses, making Raytheon a purely aerospace and defense-focused company.
- Raytheon’s commercial aircraft business has also been hit during the pandemic, weighing on its commercial OEM and aftermarket sales.
- However, there are short-term headwinds for both companies. The current high inflationary environment, rising interest rates, supply chain disruptions and fears of a slowing economy weighed on all markets.
- Our General electricity revenues and Raytheon Technologies revenue dashboards provide more information about business sales.
- Looking ahead, General Electric and Raytheon Technologies are expected to grow at a similar pace over the next three years. The table below summarizes our revenue forecast for both companies over the next three years and shows a CAGR of 1.6% for both, based on Trefis Machine Learning analysis.
- Note that we have different methodologies for businesses that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenue. For businesses negatively impacted by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery at the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies with positive revenue growth during Covid, we consider the average annual growth before Covid with some growth weight during Covid and the last twelve months.
2. Raytheon is more profitable
- General Electric’s operating margin of -6.0% over the last twelve months is much worse than Raytheon’s 11.7%.
- This compares to the -2.8% and 16.2% figures seen in 2019, before the pandemic, respectively.
- Raytheon’s free cash flow margin of 10.5% is also better than General Electric’s 5.8%.
- Our General Electric operating income and Raytheon Technologies operating result dashboards have more detail.
- When it comes to financial risk, the two are comparable. General Electric’s 55.0% debt as a percentage of equity is well above 24.9% for Raytheon, while its 8.3% cash as a percentage of assets is above 3.0% for the latter, which implies that Raytheon has a better debt position, but General Electric has more cash cushion.
3. Filet of Everything
- We see that Raytheon has demonstrated better revenue growth, is more profitable and has a better debt position. On the other hand, General Electric has a larger cash cushion and is available at a relatively lower valuation.
- Now, looking at the outlook, using P/S as a base, due to the large swings in P/E and P/EBIT, we believe General Electric and Raytheon Technologies are likely to deliver similar returns over the next three years.
- The table below summarizes our revenue and return forecasts for both companies over the next three years and indicates an expected return of 19% for General Electric over this period and a 15% expected return for Raytheon Technologies, implying that investors can choose one of the two for similar returns, based on Trefis Machine Learning analysis – General Electric versus Raytheon Technologies – which also provides more detail on how we arrive at these numbers.
While GE and RTX stocks are likely to offer similar returns, it’s worth seeing how General Electric Peers price on the measures that matter. You will find other useful comparisons for companies in all sectors on Peer comparisons.
In addition, the Covid-19 crisis has created many price discontinuities which can offer attractive business opportunities. For example, you’ll be surprised how counter-intuitive stock valuation is to Novanta vs. Abbott.
With higher inflation and the Fed raising interest rates, among other factors, GE has seen a 30% drop this year. Can it still go down? See how low General Electric’s stock can go by comparing its decline during previous stock market crashes. Here is a summary of how all stocks performed during previous stock market crashes.
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