GE Stock Isn't a Value Stock Anymore

For much of the past five years, General Electric (GE 0.68%) has been a compelling value stock. While downturns in its energy-related businesses, insurance losses, and the COVID-19 pandemic combined to pressure its earnings and cash flow, GE stock traded at a very low valuation, relative to its long-term earnings power.

That situation has changed dramatically over the past year. A string of strong earnings results and the spinoff of its healthcare unit have helped GE stock deliver a total return of 140% in just 10 months. At its current price, the company can no longer fairly be called a value stock.

GE stock hits a new multiyear high

On Tuesday, GE released yet another excellent earnings report as it continues to bounce back from the pandemic. On an organic basis, revenue jumped 19% to $15.9 billion in the second quarter, while adjusted earnings per share (EPS) nearly doubled to $0.68, compared to $0.36 a year earlier.

This performance gave management the confidence to raise its full-year outlook for organic revenue, adjusted EPS, and free cash flow.

Data source: GE Q2 2023 Earnings Presentation, slide 14. Table by author.

Following the earnings report, GE stock rallied to a new multiyear high of nearly $118. Adjusted for the spinoff of General Electric's healthcare unit back in January, that marked the stock's highest price since 2017.

You can't call this a value stock anymore

Even after a modest pullback on Wednesday, GE stock trades for an eye-watering 53 times the midpoint of its updated EPS guidance range.

GE shares did trade at a similar multiple for much of 2021. However, that was early in the company's recovery, when the pandemic still weighed heavily on the global aviation industry.

For example, GE's aerospace segment reported revenue of $4.84 billion in the second quarter of 2021, down from $7.88 billion in Q2 2019. By contrast, aerospace revenue bounced back to $7.86 billion last quarter, right in line with pre-pandemic levels.

In other words, revenue and earnings aren't temporarily depressed as they were two years ago. Today, GE's high earnings multiple implies that investors are valuing it as a growth stock. Bulls expect the company to grow -- not just recover to pre-pandemic performance levels.

Arguably, free cash flow is a more important metric for the company. GE's valuation isn't quite as lofty on that basis, with shares trading at roughly 29x the midpoint of the company's updated 2023 free-cash-flow forecast. That valuation is still more consistent with a growth stock than a value stock, though.

What now?

General Electric still has a lot going for it. The upcoming spinoff of the power and renewable energy businesses in early 2024 represents one noteworthy catalyst. While the renewable energy unit, in particular, has high growth potential, its erratic (and generally poor) profitability has weighed on GE stock's valuation. Turning the company into an aerospace pure-play could make the company more appealing to investors.

The aviation industry's recovery also positions GE's aerospace business for robust growth. Aircraft production rates could reach new all-time highs within a few years, driving demand for the company's jet engines. Even more importantly, a big increase in the fleet of in-service engines over the past decade will support predictable growth in high-margin service revenue in the years ahead.

Thus, GE could become a solid growth-at-a-reasonable-price stock as a pure-play aerospace company. Still, after its recent rally, GE stock no longer looks like a no-brainer value stock as it did for much of last year. As a result, I plan to significantly reduce my stake in the industrial giant in the months ahead.