Now that both of these manufacturing giants having released their fourth-quarter earnings reports and offered up their 2021 outlooks, it's an opportune time to sit down and attempt to gauge which company's stock is likely to do better this year.
General Electric or Boeing?
I'll cut to the chase. I think General Electric shares would be the better buy for most investors. I'll come back to that point in a moment, but Boeing might suit some investors. Specifically, Boeing might be better for those aviation bulls who are aggressively looking for upside potential from the pending return of passenger traffic.
The commercial aviation market looms large for both companies. While Boeing generated 45% of its revenue from its defense, space, and security segment (BDS) in 2020 compared to just 28% from Boeing commercial airlines (BCA), the key to the company's fortunes remains in commercial aviation. There are few reasons why.
First, BDS's operating margin over the last three years has averaged 7.4% compared to the 13.6% generated by BCA in its last "normal" year in 2018 -- the year before the 737 MAX was grounded. Simply put, BCA tends to be a much higher margin business for Boeing.
Second, the outlook for BDS is not great. On the recent earnings call, CEO David Calhoun said he believed BDS would grow "at the lower end of the single digits" because of "pressure that will ultimately come down as a result of all the COVID spending here in the United States." He also noted that order activity in the BDS segment had been pushed out internationally as a result of the pandemic.
Third, the company's other segment, Boeing global services (BGS), which accounted for 27% of revenue in 2020, is also a business tied to commercial flights.
Fourth, during the earnings call, CFO Greg Smith reiterated the point that "BCA margin progression will be highly dependent upon future production rates and will take time."
Boeing is better for aggressive aviation bulls
As such, if you believe that passenger traffic/flights/airplane orders will come back faster than most people expect, then you probably believe Boeing's earnings will exceed expectations too.
All told, it's clear that the case for Boeing stock is best made by aviation bulls. But General Electric also has significant exposure to that industry. GE Aviation generated $4.4 billion in free cash flow in 2019, helping offset a combined outflow of $2.5 billion from GE Power and GE Renewable Energy.
However, the key to the investment case for GE is based on the expectation of multiyear improvements in GE Power and Renewable Energy, ongoing strength at GE Health Care, and an improvement at GE Aviation from the trough year of 2020.
General Electric is better for everyone else
The strongest argument in favor of this position comes down to management, and specifically, the credibility that the leadership teams at both companies have with investors. Boeing has suffered a number of operational mishaps in the last few years.
If it's not the 737 Max grounding itself, it's previous management's woefully optimistic estimates for the plane's return-to-service date. Former CEO Dennis Muilenburg had originally targeted a return to service for the aircraft in October 2019. If it's not quality issues on the KC-46 military tanker, it's production issues on the 787 Dreamliner. And in more bad news, the fourth-quarter earnings report revealed that the delivery date for the first 777X has been pushed back to 2023, partly due to the need for "an updated assessment of global certification requirements." Incidentally, the 777X issue hurts GE too because it's providing the sole engine option for the aircraft.
At GE, CEO Larry Culp inherited a difficult company, but he has steadied the ship. GE is now gaining a reputation for under-promising and over-delivering. In addition, there's real evidence that Culp's focus on lean management techniques is manifesting in the form of higher margins at GE Power and GE Renewable Energy -- both segments are likely to be free cash flow generators in 2021, with Renewable Energy reaching that milestone a year ahead of schedule.
Moreover, GE's guidance for FCF in the $2.5 billion to $4.5 billion range in 2021 has a midpoint significantly ahead of Wall Street's previous consensus forecast of $2.8 billion. Whichever way you look at it, Culp has gone a long way toward restoring GE's credibility with investors.
General Electric over Boeing
All told, unless you're a strong aviation bull, it makes more sense to favor GE right now. At least it does until Boeing can demonstrate better operational performance. Until then, GE stock will be the better option for most investors.