It wasn’t just megacap tech that led the S&P 500 in 2023. Shares of General Electric (NYSE:GE) posted their biggest annual return on record (at least in data I could gather going back to 1963). While a significant advance is in the books, I still see room for appreciation in the stock given EPS growth trends, the current valuation, and broad technical strength.
I have a buy rating on the stock ahead of Q4 earnings confirmed for release next week.
GE Shares Nearly Doubled in 2023, Its Best Year On Record
According to Bank of America Global Research, GE is a highly diversified, global industrial company with Aerospace, Power, and Renewable Energy segments. The company’s products and services include power generation equipment, aircraft engines, wind turbines, and others. Over half of the business is tied to service and aftermarket support.
The Boston-based $141 billion market cap Industrial Conglomerates industry company within the Industrials sector trades at an above-market 48.9 forward non-GAAP price-to-earnings ratio and it pays a low 0.3% dividend yield as of January 12, 2024. Ahead of earnings due out next week, shares trade with an elevated 29% implied volatility percentage while short interest on the stock is modest at just 1.0%.
Back in October, GE reported a monster quarterly beat on both its top and bottom lines. Q3 non-GAAP EPS verified at $0.82, easily topping the Wall Street consensus forecast of just $0.56 while revenue of $17.3 billion, up 20% from year-ago levels, was a strong $1.6 billion beat. Total orders surged 19% year-on-year while organic orders were higher by 18%. The management team also raised its outlook for 2023 – it sees adjusted EPS in the $2.55 to $2.65 range, significantly above the consensus of $2.34 and the previous guidance range. Free cash flow also blew past estimates, now seen in the $4.7 billion to $5.1 billion range. GE received a slew of sellside upgrades and recommendations ahead of 2024, including from BofA, Wells Fargo, and Goldman Sachs.
GE: A Strong Q3, Upside Guidance
Key risks for GE include a macro slowdown, particularly in the Aerospace industry and weakness in the renewable energy market. Uncertainty around its pending spinoff is also a concern. GE Vernova (Power & Renewable segment) will spin off in early Q2 while offshore wind losses of $1 billion are expected in 2023 and 2024.
On valuation, analysts at BofA see earnings having risen about 2% last year while non-GAAP per-share profits are expected to soar to above $4 this year. Continued hot growth is seen in 2025, with EPS topping $5. The current consensus outlook, per Seeking Alpha, shows even rosier profitability trends – more than $6 of EPS is forecast by the out year. Revenue growth inflects higher this year, at a solid clip in the high single digits. Dividends, meanwhile, are forecast to hold at $0.32, so income investors may not be attracted to this long-time Industrials sector stalwart.
GE: Earnings, Valuation, Dividend Yield Forecasts
If we assume $6 of 2025 operating EPS and apply a forward P/E multiple of 23, significantly under its 5-year average, though at a premium to the sector median, then shares should trade near $138. Given operational turnarounds, lowered costs, and pending spinoff, the valuation premium is warranted in my view. What’s more, free cash flow growth is solid.
GE: Mixed Valuation Metrics, But Strong Growth Ahead
Compared to its peers, GE has a poor valuation grade at first blush, but that does not take into account the stellar growth expected in the quarters ahead. Additionally, profitability metrics are extraordinarily strong with GE while its share-price momentum is robust (I will detail an upside target I see on the chart later in the article). Finally, sellside analysts continue to re-rate the stock upwards based on a favorable ratio of positive to negative EPS revisions.
Looking ahead, corporate event data provided by Wall Street Horizon shows a confirmed Q4 2023 earnings date of Tuesday, January 23 BMO with a conference call immediately after the numbers hit the tape. You can listen live here. The company’s management team is then expected to offer color on operations at its GE Vernova Investor Day on March 6 and GE Aerospace Investor Day on March 7.
Corporate Event Risk Calendar
The Technical Take
GE has one of the cleanest technical views you will come across in today’s market. Notice in the chart below that shares are up more than 20% from a Q4 2023 low near $105. Resistance was seen in the $115 to $118 range – the highs from 2021 and during the middle of last year. That made for a bullish cup with handle formation once GE rose through noted resistance. Given the advance, an upside measured move price objective to about $170 is in play. While that is above my fundamental valuation, if we see further upside earnings guidance in next week’s Q4 report, then the intrinsic value target could increase.
As for the technicals, support is now at its previous resistance in the mid-$110s. Also take a look at the left side of the chart – there is a high amount of volume by price under the mid-$110s, as well. That should offer significant cushion (buying support) on pullbacks. Additionally, the RSI momentum oscillator at the top of the graph continues to hold in a bullish zone while price advances, so we are looking good there. Finally, with a long-term 200-day moving average that is trending higher, the bulls are clearly in charge with this stock market leader.
Overall, momentum is strong with GE, and I see upside potential to $170.
GE: Bullish Cup with Handle Pattern, $170 Technical Target, $115 & $105 Support
The Bottom Line
I have a buy rating on GE. I see the stock fundamentally undervalued while the chart is very strong ahead of Q4 results due out next week.