Buying GE After 'Outstanding' Results Set Up Stock Breakout
GE CEO Larry Culp has solidified his Hall of Fame case after a tremendous earnings report.
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On Thursday morning, GE Aerospace GE released the firm's second quarter financial results. For the three-month period ended June 30, GE Aerospace posted an adjusted EPS of $1.66 on adjusted revenue of $10.151 billion. That crushed expectations for something like $1.43 on year-over-year sales growth of 23%. On a GAAP basis, the firm produced a GAAP EPS of $1.87 (beating expectations for $1.56) on revenue of $11.023 billion (+21%). Yes, these numbers are outstanding. No, this is not your granddaddy's GE.
Chairman and CEO Larry Culp commented in the press release:
“The GE Aerospace team delivered an excellent second quarter with free cash flow nearly doubling and more than 20% growth in orders, revenue, operating profit, and EPS. We are raising our 2025 guidance and 2028 outlook, with our operating performance and robust commercial services outlook underpinning our higher revenue, earnings, and cash growth expectations. Our team is using FLIGHT DECK to improve safety, quality, delivery and cost — always in that order — as we strive to provide unrivaled customer service and deliver on our roughly $175 billion backlog."
My thoughts? Already easily in the CEO Hall of Fame for what he did in resurrecting GE and splitting it into three companies that also include GE Vernova GEV and GE HealthCare Technologies GEHC, Culp only further cements his legacy by providing an outlook three years down the road.
Remember the firm under Jeff Immelt? I'll take a pass on commenting on Immelt's leadership skills, but we've come a long way, baby.
Operations
While total revenue was growing 21% or an adjusted 23%, operating profit (net income from continuing operations before taxes) grew 63% to a GAAP $2.389B or 23% to an adjusted $2.337 billion. GAAP operating margin improved from 15.9% to 21.7%. On an adjusted basis, operating margin dropped slightly from 23.1% to 23%. This left the firm with a fully diluted EPS of either $1.89 (GAAP) or $1.66 (adjusted). How refreshing to see a firm actually adjust earnings lower from what they reported.
Segment Performance
- Commercial Engines & Services: generated revenue of $7.99 billion (+30%), which produced an operating profit of $2.323 billion (+33%). Orders increased by 28%. Operating margin improved from 27.4% to 27.9%.
- Defense & Propulsion Technologies: generated revenue of $2.563 billion (+7%), which produced an operating profit of $362 million (+5%). Orders increased by 24%. Operating margin decreased from 14.3% to 14.1%.
Guidance
For the full year 2025, GE is increasing its projected rate of growth for adjusted revenue from low-double-digits (in percentage terms) to mid-teens. Operating profit is now seen at $8.2 billion to $8.5 billion, up from $7.8 billion to $8.2 billion. The firm now expects a full year adjusted EPS of $5.60 to $5.80, which is up from previously issued guidance for $5.10 to $5.45. Projections for free cash flow have been boosted as well, from $6.3 billion to $6.8 billion to $6.5 billion to $6.9 billion.
As far as the year 2028 is concerned, the firm is increasing its outlook for double-digit CAGR from 2024 through 2028 from an outlook for high-single-digit CAGR from 2025 through 2028. Operating profit for 2028 is now seen at a rough $11.5 billion, up from a rough $10 billion. Adjusted 2028 EPS is projected at about $8.40. No prior guidance had been issued for 2028 for that item.
The firm also expected to increase returns to shareholders by 20% from 2024 levels to 2026, returning these returns to 70% of free cash flow.
Fundamentals
For the quarter reported, GE generated operating cash flow of $2.349 billion. Out of that came $327 million in capex spending and spending on internal use software. Adding back in small amounts of restructuring and separation cash expenditures, free cash flow was left at $2.105 billion, up from $1.098 billion for the comparable year ago period.
Turning to the balance sheet, GE ended the period with a cash position of $11.859 billion and inventories of $11.297 billion. That put current assets at $37.801 billion. Current liabilities add up to $36.466 billion, including short-term debt of $1.889 billion. This number also includes $9.738 billion in deferred income and contract liabilities, which are not true financial obligations unless left unfulfilled.
That leaves the firm with headline current and quick ratios of 1.04 and 0.73, respectively. However, once adjusted for those deferred revenues, these ratios improve to 1.41 and 0.99. That's much more to my liking and actually makes for a strong current situation for a large industrial business like this.
Total assets amount to $125.356 billion, including just $13.342 billion in goodwill and other intangibles. At just 10.6% of total assets, there is no issue here. Total liabilities less equity adds up to $105.911 billion, which does include long-term debt of $16,998 billion. I'm old fashioned. I'd like to see that number smaller, which is possible with the robust cash flows, but this is GE. Let's not be greedy. This balance sheet is incredible considering where it's been.
My Thoughts
I am very impressed. With the firm. With its CEO. With the cash flows. With the balance sheet. This business is executing at an extraordinary level. I have no problem admitting that I wish I were long more shares than I am.
Now, my judgement here may surprise given that I have been very positive on GE up until now. Readers will see a rising wedge, which is usually a pattern of bearish reversal. The stock has tried on Thursday morning to break out of this pattern to the upside and is struggling to do so, despite a strong tape. Relative strength is robust. The daily MACD is postured bullishly.
If the pattern can be broken and held above the pivot, which is currently $263, then we have a ballgame. I think breaking this pattern could produce a $300 target price. That said, failure to hold this level will squeeze the swing crowd out of the stock and force portfolio managers to defend the name starting at its 50-day SMA.
Bottom line? I would rather add above the pivot on momentum or down around the 50-day SMA than do so right here, right now. This is a great company moving in the right direction with an elite chief executive. Adding is a certainty for me. Timing is key now.
At the time of publication, Guilfoyle was long GE and GEV equity.
