Here’s My Buy Price for GE After Stellar Report
Wall Street is being a bit severe on this name — the results were outstanding and the guidance jaw-dropping. Here’s where I would buy it.
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GE Aerospace (GE) went to the tape with second-quarter earnings on Thursday, revealing an adjusted earnings per share of $2.02 on adjusted revenue of $12.634 billion. These adjusted top and bottom lines both easily beat expectations. On an unadjusted basis, the GE posted an EPS of $2.30 on revenue of $13.349 billion. This is a little tricky, as we do not see revenues adjusted very often. For GE, unadjusted total revenue includes run-off of the legacy insurance operations (GE Capital). Adjusted revenue excludes this to focus solely on the health of the core Aerospace business.
“GE Aerospace delivered a strong second quarter with revenue and EPS both up more than 20% driven by robust commercial services growth. FLIGHT DECK continues to fuel significant operational improvements across services and equipment with record internal shop visit output in the quarter and 31% growth in total engine deliveries in the first half,” said Chairman and CEO Larry Culp in the press release.
Culp then added, “Given our exceptional year-to-date performance and visibility for the remainder of the year, we are raising our full-year guidance across the board. As we look forward, we remain focused on advancing what matters most for our customers: delivering on our over $210 billion backlog while investing in current and next-generation technology to improve time-on-wing and cost of ownership.”
Operations (Adjusted)
As revenue grew 23.5% to $12.634 billion unadjusted total costs and expenses increased 21.6% to $10.86 billion. After insurance costs, interest charges and other items, adjusted costs and expenses grew 25% to $10.201 billion. That left a unadjusted operating income of $2.801 billion (+17%) as operating margin dropped from 21.7% to 21%.
Adjusted operating income printed at $2.746 billion (+18%) as adjusted operating margin dropped from 23% to 21.7%. Once accounting for all other income, expenses and taxes, unadjusted earnings per share grew to $2.30 from $1.87 for the year-ago comparison. On an adjusted basis, that EPS grew from $1.66 to $2.02.
Segment Performance
– Commercial Engines & Services generated revenue of $9.731 billion (+27%) on orders that grew 18%. This produced an operating profit of $2.657 billion (+20%) on an operating margin of 27.3% (down from 28.9%).
– Defense & Propulsion Technologies generated revenue of $3.443 billion (+16%) on orders that grew 12%. This produced an operating profit of $475M(+18%) on an operating margin of 13.8% (up from 13.5%).
Guidance
For the full fiscal year, GE is projecting adjusted revenue growth in the high-teens (percentage-wise) up from prior guidance for low double digits. Adjusted operating income is seen at $10.55B to $10.75B, up from prior guidance of $9.85 billion to $10.25 billion. Adjusted EPS is projected at $7.65 to $7.85 up from prior guidance of $7.10 to $7.40 and finally, free cash flow is seen at $8.9 billion to $9.2 billion, up sharply from prior guidance of $8 billion to $8.4 billion.
Fundamentals
GE generated operating cash flow of $3.258 billion (+39%) for the second quarter. Capital spending ran at $334 million. After a few other, but very minor, items are accounted for, free cash flow printed at $3.027 billion, which was up 43% year over year. Over the first six months of the fiscal year, GE repurchased $4.527 billion worth of common stock for the firm’s treasury and paid out $873M in cash dividends to shareholders.
GE ended the period with a cash position of $9.345 billion and inventories of $12.44 billion. Once investment securities not labeled as current are included that position rises to $47.225 billion. The published balance sheet runs with current assets of $39.697 billion and current liabilities of $40.43 billion. That would leave current and quick ratios of 0.98 and 0.67. Not so great. Once those investments are included, as most companies would include them, those ratios rise to 1.92 and 1.61, which is simply outstanding for a large industrial type operation.
Total assets stand at $127.672 billion, of which only 10.2% is considered to be intangible (again, outstanding). Total liabilities less equity comes to $109.805 billion. GE has $2 billion in short-term debt on the book and an additional $17.157 billion in longer-term debt on this balance sheet. With a cash position of $47.225 billion, this is not even a consideration for investors reliant upon fundamental type analysis.
My Take
While compressed margins are a concern, I think Wall Street is being a bit severe on this name. The results were outstanding and the guidance is jaw-dropping. The rapid growth in both operating and free cash flows are very encouraging. In my opinion, the only real negative is the price-to-earnings ratio at 47 times and that was known well ahead of earnings.
Readers will see that GE exploded out of the “double bottom” pattern of bullish reversal that ran from late this past February in late May. Now the shares are giving some of that rally back. My thinking, while the shares are on the back foot, is that GE can probably be initiated or added to down to the stock’s 38.2% Fibonacci retracement level of that entire move. This would stand at roughly $339. Bottom line: I am cool with and likely will re-initiate GE as long as the shares are still down on the day, down to $339.
At the time of publication, Guilfoyle had no position in any security mentioned.
