Can General Electric's Fantastic Bull Run Keep Going?

General Electric (GE 0.68%) isn't going out with a whimper but with a bang. The stock is up almost 64% over the last year as the company readies itself for a breakup that will see GE disappear as GE Aerospace and GE Vernova (a combination of GE Power and GE Renewable Energy) appear. Investors holding the stock will get a piece of both companies, but is it time to take profits, or does it make sense to keep holding the stock?

Improving but still a work in progress: GE Aerospace

The spinoff and the nature of the aerospace industry make it a bit difficult to get a handle on GE Aerospace's prospects and financials. The following table combines the guidance on the recent earnings call with the 2025 guidance on the investor day in March.

As you can see, there are some asterisks, but they shouldn't be ignored as trivialities.

Firstly, the 2024 operating profit guidance is $6 billion to $6.5 billion. Still, since this includes $600 million of corporate and stand-alone costs due to the spinoff, I've used the "current reporting" guidance for ease of comparison to show the bridge to the 2025 guidance. The same logic applies to the 2025 guidance, where management assumes $500 million in stand-alone costs, making the actual profit guidance $7.1 billion to $7.6 billion.

Furthermore, the 2024 profit margin guidance is my estimate using the midpoint of the "current reporting" guidance and assuming that 12.5% equates to low double digits.

Data source: GE presentations and author's analysis. *GE guidance excluding stand-alone costs. **Author's estimate using 12.5% revenue growth and the midpoint of segment profit guidance.

Of course, the next question is why GE Aerospace's margins will possibly be flat in 2024 and then bounce in 2025. It's especially relevant as GE's rival engine maker, RTX's Pratt & Whitney, sees margin expansion in 2024 -- a point noted by Jefferies analyst Sheila Kahyaoglu on the RTX earnings call.

GE and GE Aerospace may be conservative with their guidance. Culp has a good track record of exceeding guidance, not least in 2023, where initial guidance for $5.3 billion to $5.7 billion was easily trumped by the $6.1 billion noted in the table above.

One answer to the question comes from the nature of the airplane engine industry, whereby engines are sold at a loss only to generate decades of highly profitable aftermarket and service revenue. Indeed, GE and GE Aerospace CFO Rahul Ghai noted that the ramp in the LEAP engine (used on the Airbus A320 neo family and the sole engine on the Boeing 737 MAX) production ramp would negatively impact margins. In addition, "even though LEAP services becomes profitable in '24, it's still a margin headwind," and then there's the GE9X engine (used on the Boeing 777X) ramp in 2025 as well.

Image source: Getty Images.

Lots of places to improve: GE Vernova

Turning briefly to GE Vernova, the business managed to eke out a small profit in 2023, and management expects further improvement in 2024 with profitability at GE Power, onshore wind, and digital, offsetting losses at offshore (all GE Renewable Energy business), ultimately resulting in $0.7 billion to $1.1 billion in free cash flow (FCF).

I've discussed the game plan at GE Vernova in a previous article, and GE Vernova CEO Scott Strazik noted it had reduced the offshore equipment backlog to $4 billion and said, "The industry is beginning to reset, and while it does, we'll be highly selective on adding to the backlog."

Is GE stock a buy?

Conservatively combining the 2024 FCF guidance at both industrial businesses of ">$5 billion" at GE Aerospace and $0.7 billion to $1.1 billion for GE Vernova would put GE on a forward multiple of around 24 times FCF. That might appear rich, but it includes stand-alone costs for the breakup, and both businesses are set for long-term growth.

GE Aerospace is set for multidecade services/aftermarket revenue from LEAP and existing engines. GE Vernova's margins should improve as it works through an unfavorable backlog offshore and improves the business's margin profile.

It's still an attractive stock for investors but is not far from fair value now.