GE Earnings: Stock Should Move Even Higher on Superb Report

Key Morningstar Metrics for General Electric

• Fair Value Estimate: $123.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of General Electric’s Earnings

We’ve lifted our fair value estimate for General Electric GE stock to $123 per share from $118 following its excellent third quarter. Results materially beat our expectations (which were above the FactSet consensus) thanks to commercial aerospace demand. Following these results, management raised its outlook for revenue, earnings, and free cash flow.

Even so, we continue to model above guidance and consensus on the strength of GE’s commercial aerospace business. Commercial aerospace increased revenue nearly 29% year on year, with margin-accretive service revenue growing 31% year on year and 18% sequentially. Strong organic sales growth and a favorable mix helped total aerospace margins exceed 20% for the first time in seven quarters.

Commercial aerospace shows no signs of material deceleration yet. GE’s total aerospace book/bill (orders divided by revenue) remains at 1.2 times, which indicates continued strong demand for commercial engines and other aero-related products and services. Furthermore, supply chain issues have started to improve, as aerospace’s backlog burn rates (current revenue divided by prior-quarter backlog) have steadily moved higher on a sequential basis.

Consequently, we model about $300 million more of additional aerospace operating profit. Better-than-expected working capital improvements in inventory and receivables lead us to model about $300 million more free cash flow than the top end of guidance. We now expect $5.4 billion in free cash, which implies free cash flow margins north of 8%.