GE Aerospace stock faces valuation concerns as earnings loom

GE Aerospace stock has rallied strongly over the past year, gaining about 43% as robust demand for commercial aviation and sustained defense spending in the United States and other key markets continued to support growth. The stock was trading at around $359 in pre-market trading, with investors awaiting the company's earnings report for fresh insight into its financial performance and whether it can justify its premium valuation.

GE Aerospace expected to report strong revenue growth 

GE Aerospace, one of the biggest industrial companies in the United States, has done well in the past few years, helped by its growing market share in the civil aviation and defense spending in the US and other allied countries.

The company will publish its financial results later this week, shedding more color on its business during the quarter. Data compiled by Yahoo Finance shows that the average estimate among analysts is that its revenue jumped by 16.7% in the second quarter to $11.85 billion.

Analysts also suspect that earnings per share (EPS) is expected to jump to $1.85 from the previous $1.66. Historically, the company has a long track record of doing better than what analysts expect.

Most notably, GE Aerospace’s annual revenue is expected to continue growing, with the annual figure expected to come in at $48.8 billion, followed by $53.76 billion next year.

A potential catalyst for the company is that it received some orders during President Donald Trump's trip to China. Chinese companies ordered 200 Boeing aircraft and related equipment, with many of them being powered by CFM, a joint venture of GE and Safran.

Valuation concerns remain 

A major concern among analysts and investors is that the company has become highly overvalued, with most metrics being much higher than other companies, including fast-growing companies like NVIDIA, AMD, and Micron.

SeekingAlpha data shows that the company has a forward price-to-earnings ratio of 47, higher than the sector median of 20. Including growth, the forward PEG ratio is 3.14, also higher than the sector median of 1.68.

The same valuation figure is also visible when using the discounted free cash flow (DCF) approach. A report by Simply Wall St. estimates that the company’s fair value is $248, meaning that it is 44.6% overvalued.

As such,the company will need to provide strong revenue, earnings, and backlog numbers to justify the valuation.

Analysts are largely optimistic about the company, with Susquehanna’s Charles Minervino hiking the target from $380 to $430. Sheila Kahyaoglu, a top analyst from Jefferies, hiked the target from $365 to $455, while Citigroup hiked to $431.

GE stock price technical analysis 

GE Aerospace stock chart | Source: TradingView 

The daily chart shows that the GE Aerospace stock jumped to a high of $383 on July 2nd, and then pulled back to the current $359.

This price remains slightly above the important support of $347, its highest point on February 24. It was the upper side of the cup-and-handle pattern, a common bullish continuation sign in technical analysis.

Therefore, the most likely scenario is where the stock drops and retests the support at $347, and then resumes the uptrend. In the future, despite the valuation concerns, the stock may jump to the key resistance level of $400.

READ MORE: GE stock falls 4% despite earnings beat on fuel costs, weak outlook