We believe that industrial companies General Electric stock (NYSE: GE) and Raytheon Technologies stock (NYSE:RTX) is likely to offer similar returns over the next three years. While GE trades at a relatively lower valuation of 1.0x, with revenue lagging versus 1.9x for RTX, this valuation difference is justified given Raytheon’s superior revenue growth and profitability, as discussed below.
Looking at stock returns, Raytheon, with a return of 1% this year, has outperformed General Electric’s -30% return
: Which stock is a better bet? Portions of the analysis are summarized below.
1. Raytheon’s revenue growth is better
- Raytheon’s revenue growth of 4.8% over the past twelve months is better than a 1.1% decline in General Electric’s revenue.
- Over a longer period of time, General Electric’s revenue declined by an average of 8.4% to $74.2 billion in 2021, compared to $97.0 billion in 2018, while Raytheon’s revenue grew at an average growth rate of 23.4%. 1% to $64.4 billion in 2021, compared to $34.7 billion in 2018.
- The decline in sales for General Electric can mainly be attributed to the impact of the Covid-19 pandemic on the company’s operations, especially aviation, as commercial airlines were one of the hardest hit sectors during the coronavirus crisis.
- In perspective, Aerospace segment revenue declined 33% to $22.0 billion in 2020, compared to $32.9 billion in 2019, before the pandemic. Segment revenue declined further to $21.3 billion in 2021.
- However, with an increase in travel demand and Boeing
focused on increasing production rates, 2022 has outperformed General Electric, with Aerospace revenue up 19% to $11.7 billion in the first half of the year.
- It should be noted that GE plans to split into three companies focused on aerospace, healthcare and energy. The Healthcare business is expected to be split in 2023 and Energy in 2024, leaving the Aerospace business with GE. This move was largely seen as positive for the company, freeing up more value for shareholders, implying that GE stock could show some volatility in the coming years.
- Raytheon has undergone a major restructuring in recent years. United Technologies
merged with Raytheon to form Raytheon Technologies in 2020. In addition, it has spun off its OTIS and Carrier businesses, making Raytheon purely an aerospace and defense-focused company.
- Raytheon’s commercial aircraft business was also hit during the pandemic that weighed on commercial OEM and aftermarket sales.
- However, there are short-term headwinds for both companies. Current high inflation, rising interest rates, supply chain disruptions and fears of a slowing economy have weighed on broader markets.
- U.S General Electricity Income and Raytheon Technologies Earnings dashboards provide more insight into the turnover of the companies.
- Looking ahead, both General Electric and Raytheon Technologies are expected to grow at a similar pace over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years and points to a CAGR of 1.6% for both, based on Trefis Machine Learning analysis.
- Please note that we have different methods for businesses negatively impacted by Covid and businesses not or positively impacted by Covid as we forecast future earnings. For businesses negatively affected by Covid, we factor in the quarterly revenue recovery trajectory to predict recovery to pre-Covid revenue returns. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies that register positive revenue growth during Covid, we consider the annual average growth before Covid with a certain weight of growth during Covid and the last twelve months.
2. Raytheon is more profitable
- General Electric’s operating margin of -6.0% over the past 12 months is much worse than Raytheon’s 11.7%.
- This compares to the figures of -2.8% and 16.2% respectively in 2019, before the pandemic.
- Raytheon’s free cash flow margin of 10.5% is also better than General Electric’s 5.8%.
- U.S General electrical operating result and Raytheon Technologies Operating result dashboards have more details.
- If we look at financial risk, both are similar. General Electric’s 55.0% debt as a percentage of equity is much higher than Raytheon’s 24.9%, while 8.3% cash as a percentage of assets is higher than 3.0% for the latter. , implying that Raytheon has better debt, but General Electric has more cash cushion.
3. The net of everything
- We see that Raytheon has shown better revenue growth, is more profitable and has a better debt position. On the other hand, General Electric has more cash buffer and is available at a relatively lower valuation.
- Looking at the outlook now, based on the income statement, due to high swings in the P/E ratio and the P&L, we think that both General Electric and Raytheon Technologies are likely to see the next three years will provide comparable returns.
- The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 19% for General Electric during this period and a 15% expected return for Raytheon Technologies, meaning investors can choose one of the two for a similar return, based on Trefis Machine Learning analysis – General Electric vs Raytheon Technologies – which also provides more details on how we arrive at these figures.
While GE and RTX stocks likely offer similar returns, it’s helpful to see how Peers from General Electric rate on metrics that matter. Other valuable comparisons for companies in different sectors can be found at Pear Comparisons.
In addition, the Covid-19 crisis has created many price discontinuities that can provide attractive trading opportunities. For example, you will be amazed at how counter-intuitive stock valuation is Novanta vs. Abbott.
With higher inflation and an interest rate hike by the Fed, among other things, GE has seen a 30% drop this year. Can it drop any further? See how low General Electric’s stock can go by comparing the decline in past market crashes. Here’s a performance breakdown of all stocks in past market crashes.
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