Should You Buy General Electric (GE) After the Spinoff?

For over a century, General Electric (GE) has stood as a beacon of American business.

The Boston-based company grew to be one of the largest companies in the world…which was also its downfall.

Expanding beyond jet engines and power turbines, Jack Welch led the company into finance and credit, which blew up in its face during the Great Recession.

It took the company more than a decade to recover.

But what’s got everyone’s attention lately is the spinoff.

In 2023, GE’s healthcare division branched off into its own entity.

And in 2024, the digit and power and energy business became GE Vernova, leaving little old GE as just an aerospace company.

With shares up over 78% since December, a lot of folks are wondering whether it’s worth buying up here.

Here’s what we think….

General Electric’s Business

Without rehashing, let’s dive into the new GE.

Operating at the heart of the aerospace sector, GE Aerospace designs and manufactures aircraft engines for both commercial and defense applications. 

Its services extend to the aftermarket, providing essential spare parts and maintenance for about 70,000 engines powering three-quarters of global flights.

As of 2023, with a revenue stream of $32 billion, GE Aerospace stands as the largest engine OEM, outpacing competitors like Pratt & Whitney and Rolls-Royce.

GE Aerospace segments its business into the following areas:

Commercial Engines and Services (CES) (72% of total revenues) – Focuses on producing jet engines for major airframers such as Airbus, Boeing, and Embraer. This segment includes engines like the CFM56 and the GE90, with significant contributions from a joint venture with Safran.

Defense & Propulsion Technologies (DP&T) (28% of total revenues) – Provides jet engines for military applications, including fighters and bombers, and features additional products like avionics and marine propulsion technologies.

Source: GE Investor Presentation

With a lot of the changes and restructuring, we recommend checking out the company’s latest Investor Presentation to get a full report on the new company.

That said, it’s worth pointing out that the aerospace division is forecasted to do well in the coming years as air travel and defense spending exceed broader economic growth.

This comes on the heels of air carriers updating their fleets and expanding to accommodate more passengers and freight.

Financials

Source: Stock Analysis

Note: The financials include GE’s divisions before the spinoff

Like many industrial companies, COVID scrambled GE’s sales.

It wasn’t until 2023 that business began to rebound.

The good news is the new structure has afforded GE better margins than it’s delivered in the past, including a strong free-cash-flow margin.

Post-spinoff, the company was left with $22.9 billion in debt with $20.6 billion in cash, leaving it in a healthy position, given it generates around $5.1 billion in cash from operations and only spends about $1.6 billion in Capex.

This leaves about $18-$19 billion over the two years management expects to return to shareholders, or about an 11% yield.

Valuation

Source: Seeking Alpha

GE’s current valuation is a bit pricy, especially compared to other specialty industrial companies.

In fact, the only one with a higher price–to–cash flow is Chart Industries (GTLS), which makes process technology and equipment for gas and liquid molecules.

As you’ll see below, its valuation is justified by the higher-than-average growth.

Growth

Source: Seeking Alpha

GE’s double-digit YoY sales growth stands out, especially against forward estimates of a decline of nearly 20%.

However, the company’s slide deck suggests revenues will grow in the low-double-digits in 2024.

And since the financials include other divisions, we can’t assume historical growth or declines are indicative of the future.

If we assume management’s guidance, the key point is they expect steady growth through 2028.

Profitability

Source: Seeking Alpha

GE’s profitability is good. But management expects it to get better.

Operating profits are expected to improve from price actions and productivity.

Plus, as the company frees up cash, it’s expected to return a significant amount to shareholders.

Our Opinion 8/10

General Electric’s streamlined business looks more efficient and effective.

Management expects substantial improvements in margins, coupled with secular demand for its products.

While the current valuation is a bit high, we feel it’s both justified and likely to change as the spinoff fades into the rearview mirror.

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