GE Aviation (GE) and Rolls-Royce (RR) stocks have done well in the past few years, helped by a favorable business environment and turnaround strategies by their management. GE shares have jumped by 48% in the last twelve months, while Rolls-Royce has jumped by over 124% in the same period.
Favorable business environment
Rolls-Royce and GE Aviation have done well because of the ongoing business environment, especially in the civil aviation industry.
Companies like Boeing and Airbus have continued to report order inflows from global airlines, which is a boom for engine manufacturers. Airbus has an order backlog of over 8,600 airplanes, while Boeing has over 5,600 orders.
RR and BA benefit from these orders because they are the biggest companies in the airline manufacturing industry.
Airlines have also reported strong results as the industry moved back to their pre-pandemic levels. In addition to selling engines, the two companies make money in long-term servicing contracts.
Read more: Rolls-Royce share price is trading at a 60% discount – DCF
At the same time, the rising geopolitical events have led to more demand for military planes. Again, Rolls-Royce Holdings and GE Aviation are some of the top contractors in this industry, manufacturing engines for planes and ships.
All these factors have contributed to the spectacular financial results by the two companies in the past few quarters.
Earlier this month, Rolls-Royce Holdings said that its underlying operating profit will be between £2.1 billion and £2.3 billion, while its free cash flow will be between £2.1 billion and £2.2 billion. These are huge numbers for a company that was about to go bankrupt during the pandemic.
Rolls-Royce said that demand in its civil aviation division was strong, with large engine flying hours rising by 18%. These hours will be between 100% and 110% of the 2019 levels.
Its defense business also benefited from the ongoing testing of the F130 engine and the Future Long Range Assault Aircraft program.
Meanwhile, GE said that its revenue jumped by 6% to $9.8 billion as its orders jumped by 28% to $12.6 billion. Its profit also jumped to $1.9 billion.
Read more: Here’s why the Rolls-Royce share price could surge to 600p soon
Turnaround efforts are working
The two companies have also benefited from turnaround efforts by the management. GE Aviation became a standalone company after the management separated it from GE Vernova and Healthcare.
The management hopes that the standalone company will be more profitable and focused to narrow priorities. It also expects to increase distributions to shareholders. It has returned $4.4 billion to shareholders this year, and the trend will continue.
Rolls-Royce has also resumed paying dividends as its profits jumped. Its turnaround measures have involved exiting some loss-making operations like selling its Naval Propulsors & Handling. It has emerged as a leaner and more profitable company.
Rolls-Royce and GE stocks have pulled back
Recently, however, there are signs that the recent momentum has started to wane. GE Aviation stock has dropped to $177.58, down by over 8.7% from its highest point this year. Most of this decline happened after the company published strong results and issued a weak forward guidance.
On the other hand, the Rolls-Royce share price has moved into a correction after falling by 11.25% from its highest level this year.
The stocks have also retreated because of concerns about their valuations. Rolls-Royce has a forward P/E multiple of 31.7, while GE has a multiple of 41. As such, the decline is likely because of a valuation reset,
Therefore, there is a likelihood that the GE and Rolls-Royce share prices will remain under pressure in the near term and then bounce back. If this recovery happens, the next point to watch for Rolls-Royce will be at 592p and $195.
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