Raising GE’s Stock Valuation by 20%

Key Morningstar Metrics for GE Stock

• Fair Value Estimate: $154.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Fair Value Uncertainty: Medium

After reviewing General Electric’s GE 10-K filing, we’ve raised our fair value estimate by 20% to $154. Our long-term estimates for midcycle margins and cash remain unchanged, but we’ve lowered our discount rate by 130 basis points on greater fundamental certainty. We’ve also lowered our Uncertainty Rating to Medium from High. In summation, GE is no longer the troubled conglomerate it was five to seven years ago, consistently extinguishing fires. Instead, CEO Larry Culp has positioned these businesses as more nimble leaders serving mission-critical needs. Our revised valuation reflects this increased confidence.

We think it’s appropriate to treat GE Aerospace and GE Vernova as separate businesses with the upcoming spinoff of the latter. Consequently, we employ a 9% cost of equity for Aerospace while still using an 11% cost of equity for the energy asset. Rolling this up yields us a WACC of 9%. Aerospace’s backlog and order book remain exceptional. The segment’s book/bills (orders divided by revenue) consistently total about 1.2 times, and its backlog keeps growing strongly both year on year and sequentially. We expect it will take three additional years before Aerospace reverts to “normal” mid-single-digit sales growth. Even in the out years of our five-year explicit forecast, we think sales will remain somewhat elevated.

In Vernova, the U.S. Inflation Reduction Act is a game changer, providing that business with a much healthier backdrop than when GE had to contend with the nonrenewal of the U.S. production tax credits. Consequently, we’re far more confident that Vernova CEO Scott Strazik’s efforts toward driving greater productivity will become more evident in operating margins. Of course, the offset will be offshore wind, which still has a few years of difficult backlog. Having said that, a greater mix of North American projects and expected sales acceleration in the back half of the decade should surprise investors to the upside.