Why Is General Electric Stock Going Up?

General Electric Company, doing business these days as GE Aerospace (NYSE:GE) operates as an aerospace and defense business after shedding a lot of divisions that historically had led to revenue diversification. Yet, the narrower focus doesn’t seem to be a problem for investors who are currently favoring the stock.

Over the past three years, GE Aerospace’s stock has gained more than 75%, which doesn’t mimic the skyrocketing gains of some large tech names but is still a healthy return.

So, why exactly has the stock gone on such a big run and is there still wind in the sails for new investors buying in now?

Air Traffic Demand Has Soared In Recent Years

After the unusual 2020-21 era, the aviation industry was scrambling to cater to the pent-up consumer demand to get away from being cooped up in the homes and subsequently air traffic passenger demand absolutely ballooned by over 36% from the prior year.

A fallout for airline firms followed whereby, first and foremost, air ticket prices skyrocketed. Despite this, Americans were not reluctant to travel last year.

Still they had their fair share of headwinds to contend with, not least airplane integrity concerns. We witnessed an extremely tough year for popular airplane maker Boeing, stemming from increasing airplane safety issues. It’s probably fair to say the entire plane manufacturing industry is at risk of being plagued by them.

Why Is General Electric Stock Going Up?

General Electric management essentially stripped the firm of its many divisions and ended up consolidating GE Aerospace under the GE ticker symbol, which has produced a highly profitable firm that shareholders have bought in droves.

Now, the General Electric Company operates as three separate public entities: GE Aerospace, GE Vernova, and GE Healthcare.

The breakup of the firm essentially ended the 132-year history of the conglomerate but was a necessary effort to revive the company’s health after some tough times that saw investments fail to pay off.

After the company’s new CEO, Larry Culp, took up the job, he focused on cost-cutting and streamlining operations. And the strategy worked for GE, which gradually recovered.

After the three-way split this year, General Electric was left with its aerospace business under the ticker “GE,” which operates as an engine maker for Boeing and Airbus. The aerospace business is also seeing some gains following jet delivery delays that have forced higher demand for aftermarket services.

The spun-off company has also introduced a newer operating model (called “FLIGHT DECK”), which is leaner than was previously the case. At the core of this more systematic approach are 10 fundamentals like “kaizen,” or continuous improvement and “genba” or the actual place.

After this move, the focus of GE Aerospace has turned towards expanding capacity through contracts. FLIGHT DECK is also being applied more broadly to encompass all products. This approach stands to benefit shareholders because, first, it reduces waste, and secondly, it lowers turnaround times, and so enables the firm to deliver more shop visits for its LEAP engines.

28% Increase In Orders Drives GE Higher

In Q3, management reported a 28% hike in orders on the back of rising demand. The commercial space, which is its biggest moneymaker, saw a spike in orders to the tune of 29% and also recorded more than 20% growth in both services and equipment. There was a significant tailwind from the widebodies and narrowbodies segment due to order backlogs.

In the defense segment, orders also climbed and were up by 19%, but a drop was seen in engine deliveries year-over-year, although there was a sequential increase recorded.

Overall revenue marginally rose by 6% from the prior year’s period to $9.84 billion, and that was a beat versus analysts’ expectations.

Furthering the bulls argument is the fact that GE Aerospace is also strongly profitable at this point, and its bottom line only grew further in Q3. On an adjusted basis, earnings per share came in at $1.15, recording a solid 25% growth from its year-ago value and, just like the top line, topped what the analysts were expecting.

Shareholders can take solace knowing that management has an eagle ye on servicing and growing the aviation industry’s most extensive commercial installed base as well as by the good cash position. That balance sheet strength indicates that the leaner model is working well, triggering management to raise its outlook for the upcoming quarter.

Is GE Stock a Buy?

If analysts are to be believed, GE has considerable upside now of 21% to a fair value price target of $210.12 per share. Sentiment has fallen somewhat, however, and 4 analysts have revised their estimates lower for the upcoming quarter.

It’s worth having a healthy dose of skepticism on valuation now though with the price-to-earnings ratio sitting at 34x. Still with $6 billion in profits on $69 billion in revenues, there is lots to like now about GE and its future prospects.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.