GE’s Easy Share Gains Are Over, but Upside Still Remains; Investor Patience Will Be Key

After reviewing its 10-K filing and additional data points, we raise our fair value for narrow-moat-rated GE by over 13% to $100. Our latest raise once again puts us at the high end of consensus price targets that on average, have gravitated toward the high-80s. We also retain our High Uncertainty Rating given the difficulty in forecasting GE Vernova’s fundamentals.

Aside from an additional year of revenue during our explicit forecast that we expect will gravitate toward the lower end of mid-single digits during our perpetuity value, we also lift our midcycle operating margin by 130 basis points. The impetus for the raise came from the benefits we expect GE Vernova will enjoy thanks to the Inflation Reduction Act. If we’re right, we expect GE will be able to one day maintain a lower midteens operating margin through the economic cycle, all-in. And while GE hasn’t publicly committed to this, we think its comments during its 2022 investor outlook imply that it should be able to not only hit its high-single-digit free cash flow target in the near term, but eventually breach into the double-digits in the back half of the decade.

However, we caution investors that the easy gains in the stock have largely gone away. In fact, pricing GE on next year’s EV/EBITDA implies a breakup value of $91, which is little upside from the $85 GE shares trade at the close of Feb. 15. Said differently, for GE to fully realize our fair value, it will have to reach maintainable profitability in the back half of the decade. We think investors are giving full credit for GE Aerospace’s franchise, which we believe is arguably the premier franchise in the entire U.S. multi-industry category.