Is General Electric Stock a Buy?

The industrial conglomerate is doing what it takes to significantly improve earnings in 2023.

It's been a mixed year for General Electric (GE 1.30%), with disappointing healthcare and renewable energy earnings offset by robust aerospace and power performance. Still, it might surprise investors that the stock's price decline of 11.6% is an outperformance compared to the S&P 500 index's 20% decline.

So does the stock have enough earnings momentum to justify buying it now?

General Electric in 2022

GE will likely miss the earnings expectations in its investor day presentation in March -- management has already told investors it will. The current full-year adjusted earnings per share (EPS) guidance is $2.40 to $2.80, compared to guidance for $2.80 to $3.50 given in March. Moreover, the segment commentary and outlook comments provided on the third-quarter earnings presentations imply that GE will have difficulty getting near its full-year guidance.

This table shows the March guidance and the updates given in late October. A quick look shows Power and Aerospace in line, with a significant shortfall in Renewable energy and a disappointment in HealthCare. Meanwhile, corporate costs are forecast to be less than previously expected.

GE Segment	Investor Day Outlook (March)	October Outlook	Notes*
Power	$1 billion to $1.2 billion)	$1 billion to $1.2 billion	In line
HealthCare	$3.1 billion to $3.3 billion	$2.6 billion	Supply chain disruptions
Aerospace	$3.8 billion to $4.3 billion	$3.8 billion to $4.3 billion**	Management's implied guidance suggests a significant upgrade
Renewable Energy	($0.7 billion)- ($0.5 billion)	($2 billion)	Supply chain disruptions, political uncertainty, restructuring actions
Corporate Costs	($1.1 billion)	($0.7 billion)	Upside potential to estimates

Data source: General Electric presentations. *Author's analysis. **Not stated, but management didn't adjust it either.

Three reasons why General Electric can outperform

Superficially, the updated guidance doesn't look good. That said, there are a few key factors to consider.

First, the HealthCare shortfall is largely down to supply chain challenges, which should ease in the future, and orders growth (up 4% in the third quarter and year to date) is in line with management's expectation for mid-single-digit revenue growth.

There isn't a problem with orders or market positioning at GE HealthCare. Instead, the problem lies with executing on a backlog while dealing with supply chain constraints and inflationary pressures -- both issues stress profit margins. Still, the supply chain issues won't last forever, and GE HealthCare CEO Peter Arduini says, "While challenging, we expect supply chain pressures to improve for the remainder of '22 and into '23."

Second, management expects to have less corporate costs than expected in 2022 -- something CFO Carolina Dybeck Happe put down to "a few hundred million of favorability, primarily from interest rate and favorable currency movements." Given that interest rates have continued to rise through the current quarter, it's reasonable to expect some potential improvement on the expectation of a loss of $700 million.

Third, I've discussed the restructuring plans at GE Renewable Energy elsewhere. Note that the whole industry is restructuring, which should lead to higher margins.

Fourth, and most significantly, GE Aerospace is set to trump existing guidance considerably. At the investor day, management guided toward more than 20% full-year growth with a "mid-teens" profit margin, leading to segment profit of $3.8 billion to $4.3 billion. However, revenue growth was 24% in the third quarter and 21% in the first nine months compared to the same period of 2021. Given that supply chain issues are easing, organic orders growth was 25% in the third quarter, and GE Aerospace spares rate sales are soaring (see chart), it's reasonable to expect a solid fourth quarter.

Data source: General Electric presentations.

Moreover, management now expects "high teens" margins for GE Aerospace in 2022. Penciling in 20% growth for the fourth quarter leads to revenue of $7.3 billion for the quarter and $25.7 billion for the full year -- or 20.7% growth on 2021. Assuming "high teens" means 17.5% to 20%, GE Aerospace could report $4.5 billion to $5.1 billion in profit for 2022 -- significantly ahead of the $3.8 billion to $4.3 billion guidance.