General Electric (GE +6.76%) and Raytheon Technologies (RTX +2.24%) have much in common. They are the two leading manufacturers of aircraft engines in the world, with positions across major programs at Boeing and Airbus. Most prominently, they compete (GE via its joint venture with Safran, CFM International) with rival engines on the Airbus A320 NEO family of aircraft (CFM also contributes the sole engine on the Boeing 737 MAX) -- the two planes are the workhorses of the skies. They also both appear to be good value stocks, and they both have challenges in meeting their full-year guidance. Let's consider the latter two points and see what the companies need to do to meet management aims.
NYSE: GE
Key Data Points
Green flags
The commercial aerospace operations of both companies exceeded expectations in the first half and are well on their way to beating initial estimates for the full year. In fact, Raytheon recently raised its full-year profit expectations for its commercial aerospace-focused businesses (Collins Aerospace and Pratt & Whitney), helping to offset a lowering of expectations for its defense-focused businesses (Raytheon Intelligence & Space, or RIS, and Raytheon Missiles & Defense, or RMD). The result was management maintained its full-year guidance. Focusing on the free cash flow (FCF) part of the guidance, management continues to expect $6 billion in 2022, putting it on a price-to-FCF multiple of 22 times FCF. That may seem expensive, but recall that management intends to reach $10 billion by 2025 as the air travel recovery continues.
Turning to GE, its aerospace segment management reiterated the full-year guidance given in its investor day presentation for organic revenue growth above 20% and segment profit of $3.8 billion to $4.3 billion. Given that organic revenue growth was almost 20% in the first half, and segment profit was $2.06 billion, GE Aviation looks on track to achieve its aim. The key driver is surging spare parts sales, which increased to $23.1 million per day in the first half from $14.1 million in the same period last year. Given the strengthening recovery in commercial aerospace, it's reasonable to expect GE and Raytheon are well on track in their aerospace operations.
NYSE: RTX
Key Data Points
Red flags
Turning to more problematic matters, both companies appear to have their work cut out for them to meet guidance in one of their segments -- GE Healthcare and RMD. In both cases, the issues pertain to the difficulty of dealing with supply chain issues, such as component availability and raw material supplies. To articulate the challenge ahead, here's a table of guidance showing what both segments achieved in the first half.
| Company (Segment) |
Full-Year 2022 Guidance |
First-Half 2022 Performance |
|---|---|---|
|
General Electric (GE Healthcare) |
Mid-single-digit organic revenue growth, segment profit of $3 billion |
Organic revenue of $9.02 billion, representing 2.9% growth, and $1.2 billion in segment profit |
|
Raytheon Technologies (RMD) |
Sales up slightly, adjusted operating profit to decline by $50 million on 2021 or be flat |
Sales of $7.1 billion, representing an 8.9% decline, and an adjusted operating profit of $735 million |
Data source: General Electric and Raytheon Technologies presentations.
Starting with GE Healthcare, full-year organic revenue in 2021 was $17.4 billion, and a 4%-6% increase (mid-single-digit growth as outlined in the table above) is $18.1 billion to $18.4 billion. This implies $9.1 billion to $9.4 billion in second-half revenue, or 5.1%-9.1% growth on the $8.6 billion in the second half of 2021. In other words, GE Healthcare has to ramp up its organic growth rate significantly in the second half and generate $1.8 billion in profit when it only generated $1.2 billion in the first half.
It's an even more significant challenge for Raytheon's RMD. Full-year 2021 sales were $15.5 billion, and just to get there, RMD will need $8.5 billion in sales in the second half of 2022, representing an increase of 8.9% on the same period in 2021. Meanwhile, RMD's adjusted operating profit needs to hit $1.24 billion in the second half to reach its full-year guidance's midpoint.
Looking ahead
Both companies have significant challenges in hitting the segment guidance discussed above, as the supply chain challenges faced by both aren't going to disappear overnight. It's probably more of an issue for GE as it's preparing to spin off GE Healthcare in early 2023.
Still, both companies' commercial aerospace businesses have the potential to beat estimates, and at some point, GE Healthcare and RMD will be able to overcome their supply chain issues.
Just don't be surprised if both segments miss their guidance, and keep an eye on conditions in commercial aviation because it's the key to both companies hitting their overall guidance in 2022.
