After 60% Gains This Year Is GE Aerospace Stock Still A Better Pick Over Lockheed Martin?

We believe that Lockheed Martin stock (NYSE:LMT) is currently a better pick than its industry peer – GE Aerospace stock (NYSE: GE), given its better valuation and robust prospects. GE stock trades at a higher multiple of 40x forward expected earnings, versus 18x for LMT, and we think this gap in valuation will narrow in favor of Lockheed Martin. There is more to the comparison, and in the sections below, we discuss why we think LMT will outperform GE in the next three years. In this analysis, we compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. GE Stock Has Fared Better In The Last Three Years

GE stock has seen extremely strong gains of 200% from levels of $55 in early January 2021 to around $165 now, vs. an increase of about 30% for LMT from $355 to $465 over this period. This compares with a 45% gain for the S&P 500 over this roughly three-year period. However, the increase in GE and LMT stocks has been far from consistent. Returns for GE stock were 10% in 2021, -11% in 2022, and 96% in 2023, while LMT stock saw returns of 0%, 37%, and -7% over these years, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that GE underperformed the S&P in 2021 and LMT underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for other heavyweights in the Industrials sector, including CAT, HON, and UNP, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could GE and LMT face a similar situation as they did in 2021 and underperform the S&P over the next 12 months — or will they see a strong jump? While we expect both stocks to trend higher, Lockheed Martin will likely fare better than GE Aerospace.

2. GE Aerospace Has Seen Better Revenue Growth

GE Aerospace saw its proforma revenue rise 43% from $24.6 billion in 2021 to $35.3 billion in the last twelve months, while Lockheed Martin has seen its sales rise just 3% from $67.0 billion to $69.6 billion over the same period.

The revenue growth for GE Aerospace has been driven by its service segment, which saw a large 63% rise between 2021 and 2023. This growth is being fueled by a robust aftermarket demand for engine servicing and maintenance of aircraft. This trend is expected to continue, faring well for GE Aerospace.

Lockheed Martin’s revenue growth over the recent years has been led by higher production volume for its Sikorsky helicopter programs, AC-3, Long Range Anti-Ship Missile (LRASM), and the Joint Air-to-Surface Standoff Missile (JASSM) program, among others. The company is seeing a higher volume of production contracts for F-35 and the national security space program driving its sales growth, a trend expected to continue in the near term. With ongoing geopolitical tensions in Russia-Ukraine and Israel-Hamas, the defense spending for some countries will remain elevated, boding well for Lockheed Martin.

Looking forward, we expect GE Aerospace to see its sales rise around 20% from $35 billion in 2023 to over $42 billion in the next three years. In comparison, we expect Lockheed Martin’s sales will likely rise around a little under 10% from $68 billion to $74 billion over this period.

3. GE Aerospace Is More Profitable And It Has A Better Financial Position

Lockheed Martin’s EBIT margin of 12.0% in 2023 has seen slight growth from 11.3% in 2021, while GE Aerospace’s EBIT margin expanded from -19.1% to 29.5% over this period. Now that General Electric got split into three companies – GE Healthcare, GE Vernova, and GE Aerospace – the margin profile for GE Aerospace is expected to be robust going forward.

Looking at financial risk, GE Aerospace fares better than Lockheed Martin, with its 12% debt as a percentage of equity being lower than 18% for the latter. Moreover, its 13% cash as a percentage of assets is higher than 5% for Lockheed Martin, implying that GE Aerospace has a better debt position and more cash cushion.

4. The Net of It All

We see that GE Aerospace has demonstrated better revenue growth, is more profitable, and has a better financial position. Now, looking at prospects, we believe LMT is the better choice of the two, given its attractive valuation. At its current levels, LMT stock is trading at 18x forward expected earnings of $26.20 in 2024, compared to 17x average P/E over the last three years. In contrast, GE stock trades at 40x forward expected earnings of $4.10 in 2024, aligning with its average P/E over the last three years. GE stock has rallied over 200% since early 2021 on the back of its restructuring efforts to separate into three companies. Investors have assigned a higher valuation multiple for GE Aerospace now, owing to its robust expected sales and earnings growth in the coming years. Moreover, General Electric was able to significantly reduce its debt from $78 billion in 2020 to $23 billion in 2023, fueling its stock price growth. However, we believe that much of these positives are now priced in for GE Aerospace.

On the other hand, a slight rise in valuation multiple for Lockheed Martin seems justified in the current environment of geopolitical tensions, bolstering the overall defense spending for some countries. Lately, the company has been seeing growth across its segments. For perspective, its Missiles and Fire Control segment saw a solid 25% sales growth in Q1’24, while Rotary & Mission Systems sales were up 16%, the Space segment saw 10% revenue growth, and Aeronautics sales were up 9%. Earlier this year, the company won a multi-year contract worth $17 billion to develop the next-generation interceptors to protect the U.S. from intercontinental ballistic missiles. With an increased focus on defense spending for some countries, Lockheed Martin should continue to do well, warranting an uptick in its valuation multiple. Our Lockheed Martin’s Valuation dashboard offers details on our estimates for the company.

While LMT may outperform GE in the next three years, it is helpful to see how GE Aerospace’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 7/4/2024
[2] Cumulative total returns since the end of 2016

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