Should one Buy, Sell, or Maintain Positions in GE Aerospace's Shares?
The erstwhile colossal General Electric, known for its diversified operations, is no longer in existence. Today, the 'GE' label is associated with GE Aerospace (-0.13%), a company that now focuses solely on the aerospace and defense sector.
This more targeted venture is a fitting home for the iconic 'GE' ticker. However, whether purchasing GE Aerospace stock is advisable today - buy, sell, or hold - is a question worth considering.
Motivations to buy GE Aerospace
Following the disintegration of General Electric, several business units were spun off as independent entities, while others were sold off. GE Aerospace remained, prominent in supplying components and services to the aerospace and defense sectors. Wall Street has high hopes for this niche, with some analysts anticipating the addition of around 45,000 new aircraft to the consumer aviation industry over the following two decades at a cost of $3.3 trillion. Given its robust position, GE Aerospace is well-prepared to capitalize on this burgeoning market.
The company boasts a substantial backlog of work worth $149 billion on the civilian side, with an additional $18 billion from the defense sector. This brings the company's total workload to well above $150 billion, establishing a healthy work pipeline to fuel its revenues and earnings over the coming years.
In the third quarter of 2024, GE Aerospace reported a 25% increase in earnings, up from the previous year. This impressive performance was driven by a 6% revenue growth and a 150-basis-point enhancement in the company's profit margin. These revenues and earnings have set a strong foundation for GE Aerospace as it embarks on its standalone journey, following the final spinoff of noncore assets in April 2024.
Rationale for holding GE Aerospace
Continuing to invest in GE Aerospace stems from the belief that the company will continue to thrive within the anticipated long-term growth of the aerospace sector. Yet, it's essential to consider that the stock has exhibited unprecedented growth over a short period, doubling its value within a year.
This swift advance includes the period during which GE Aerospace was still a part of its predecessor, General Electric. Moreover, GE Verona, the last company spun off, has followed a similar trajectory, tripling its value since its April 2024 separation. Skepticism may be warranted regarding the rationale behind such stock price increases, even as GE Aerospace appears to be in a strong position to serve the expanding aerospace market.
Nevertheless, a long-term outlook and a faith in GE Aerospace's promising future would not justify selling the stock, given the potential for price volatility in the short term as Wall Street seeks to properly value the company.
Considerations to sell GE Aerospace
If you have accrued significant profits, cashing out a portion of your investment following this sudden surge in value would be understandable. Wall Street is often driven by emotion when setting stock prices, and the current trend is to reward companies that have undergone transformations through spinoffs and asset sales. By capitalizing on this investor enthusiasm, you could secure your gains.
However, deciding whether to acquire new shares or avoid GE Aerospace is a more complex issue. Following its impressive third-quarter performance, GE Aerospace's P/E ratio has fallen to a reasonable 36 times, just slightly higher than the average 35 P/E for the aerospace and defense industry, as represented by the SPDR S&P Aerospace & Defense ETF (1.85%). This suggests that GE Aerospace is currently fully valued, which may not be appealing for those seeking to invest in underpriced stocks. Additionally, with a measly 0.6% dividend yield, investors focused on income generation might find little appeal in GE Aerospace.
GE Aerospace is a multifaceted situation
The transformation undergone by GE Aerospace, following the upheaval at its predecessor General Electric, involves consuming detailed information. Despite these challenges, GE Aerospace's trajectory towards growth within a promising industry might encourage stock purchases. However, the stock's recent surge in value, coupled with its current valuation, leaves room for consideration before making an investment decision.
In light of the anticipation for the aerospace sector's long-term growth, investing in GE Aerospace's stock could potentially yield profits due to its prominent position in supplying components and services to the industry. The company's impressive third-quarter earnings, including a 25% increase in earnings and a 6% revenue growth, further emphasize its robustness.
On the other hand, if you've already made substantial profits from GE Aerospace's stock, selling a portion to secure your gains could be a reasonable decision, given Wall Street's current trend of rewarding companies undergoing transformations like spinoffs and asset sales. However, determining whether to buy new shares or avoid GE Aerospace altogether requires careful consideration, as its current P/E ratio is slightly higher than the industry average, and its dividend yield is relatively low.
