Better Buy: General Electric Company vs. Boeing

Boeing (BA +1.34%) and General Electric (GE +2.16%) are two industrial heavyweights that have been moving in opposite directions in recent years. Boeing shares are up 164% during the past three years, while shares of GE are down 52% during the same period.

The reasons the stocks have moved the way they have are well-documented: Boeing is benefiting from perhaps the longest-running commercial aircraft order up-cycle in history, while GE has been plagued by its massive debt load and a slowdown in the energy sector.

Source: Yahoo! Finance, data as of Oct 10. TTM = trailing 12 months, P/E = price-to-earnings ratio, P/S = price-to-sales ratio.

Looking back, it's clear that Boeing would have been a significantly better buy three years ago. But with GE shares much cheaper and Boeing more expensive, is that still true today? Here's a look at where the two companies stand with an eye toward determining which, if either, is the better buy.

Short-circuited

General Electric has generated a steady stream of bad news since 2016, with the one-time American business icon issuing a series of step-downs to revenue and earnings guidance, slashing its dividend, and putting various businesses on the block in an attempt to reduce its more than $115 billion in total debt.

General Electric has high hopes for its portfolio of advanced turbine engines. Image source: General Electric.

The company fired CEO Jeff Immelt a year ago, and earlier this month, replaced his successor John Flannery with one-time Danaher chief Larry Culp. GE also announced a $23 billion impairment charge at its power unit and conceded that its 2018 adjusted earnings and free cash flow guidance was too high. As my colleague Lee Samaha said soon after that latest CEO change, "GE has done a terrible job of turning itself around and managing investor expectations."

Indeed, there's little evidence to suggest that even after all this turmoil, GE is close to getting its house in order. Culp, who is widely respected among industrial investors, is inheriting a company that still has to borrow to meet its cash needs -- including that now-reduced dividend -- and is in the process of spinning off its healthcare business as a stand-alone company and reversing its acquisition of Baker Hughes.

There's still value in some of GE's businesses, most notably its massive aviation segment. GE Aviation, as part of a joint venture with France's Safran, makes the LEAP engine used on Boeing's hot-selling 737 and Airbus equivalents. GE's portfolio of renewable-energy assets is substantial, and its power business is well-positioned for whenever a recovery might come.

There also is the well-regarded healthcare division, which will provide value to shareholders whether it's split off as planned or if Culp decides to reverse course and keep it in-house. And GE should benefit from its work reducing structural costs -- GE Power alone is on track to cut costs by $1 billion this year -- an area where Culp excelled while at Danaher.

GE is a mess, but a mess with potential.

Flying high

Boeing has enjoyed much better fortunes. The company's commercial-aviation unit, thanks to the strength of its 737 and 787-Dreamliner programs, boasts a backlog of more than 5,800 frames nearly a decade into an uptrend that has defied gravity in what has traditionally been a highly cyclical business.

Boeing's family of 777 and 787 twin-aisle commercial jets. Image source: Boeing.

There's no sign of that surge slowing. Boeing continues to perform well versus archrival Airbus in terms of new plane orders. It's slowly working through issues in its supply chain that have put limits on new plane deliveries while working closely with airline customers on development of a rumored 797 new design.

Boeing's defense unit, which in recent years has taken a back seat to commercial and currently accounts for less than one-third of total revenue, is also showing positive signs. Less than a year after an internal overhaul of the business prompted, in part, by delays to its KC-46 tanker that led Air Force officials to question whether Boeing is committed to defense, the unit has an ongoing winning streak.

In the last 45 days, Boeing Defense has won a potentially $10 billion contract to make Navy refueling drones, a $2 billion-plus competition to produce a new Air Force helicopter, and a $9.2 billion Air Force trainer competition.

There are plenty of caveats to these wins. Given the size of the competitions, Boeing is likely to face protests from competitors that could, if nothing else, delay the process. And all are fixed-price contracts, meaning that if Boeing can't avoid the troubles it experienced with the KC-46 tanker -- where it has taken more than $3.4 billion in charges -- the profitability of these deals could be limited. At best, less than 10% of the nearly $22 billion in estimated contract value is expected to be recorded in the next three years.

But if nothing else, the defense resurgence should provide reason for investors not to worry about holding Boeing stock. When the commercial surge eventually subsides, defense is going to have to pick up the slack. The unit appears much better-positioned to step up now than it did just a year ago.

And the better buy is...

There have been numerous times over the past few years I've considered buying GE, and each time I've been glad I didn't. As I've said, there's real value in this collection of assets, but the problems are severe enough and management's apparent grasp on those problems is questionable enough that I'm glad to have stayed away.

That said, Boeing shares are expensive relative to the company's history using almost any metric you choose. While the continued strong backlog and revival of the defense business are enough to provide confidence that Boeing's current share price can be sustained, it's hard to say how much higher Boeing can go with so much good news already baked in. Throw in external factors like a potential trade war with China -- a massive Boeing commercial customer -- and I see more reasons to hold the stock today than to buy into it now.

The short answer is there are better buys in both the industrial and defense sectors. If forced to choose between the two, I would open a small position in General Electric, do my best to ignore the news flow out of the company for the next six to 12 months, and hope for the best. But neither company is at the top of my buy list at this moment.