{"id":5682,"date":"2023-10-26T18:48:29","date_gmt":"2023-10-26T18:48:29","guid":{"rendered":"https:\/\/infundpros.com\/investment\/gmge-rtx-earnings-show-this-economy-is-wild-its-a-strange-backdrop\/"},"modified":"2023-10-26T18:48:30","modified_gmt":"2023-10-26T18:48:30","slug":"gmge-rtx-earnings-show-this-economy-is-wild-its-a-strange-backdrop","status":"publish","type":"post","link":"https:\/\/infundpros.com\/?p=5682","title":{"rendered":"GM,GE, RTX Earnings Show This Economy Is Wild. It\u2019s a Strange Backdrop."},"content":{"rendered":"
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This economy is wild. It isn\u2019t easy for investors to navigate through it all. It\u2019s time to stick to the basics: Buy quality companies and don\u2019t pay too much. <\/p>\n

The economy is slowing and interest rates are rising, stressing consumers\u2019 resources. Naturally, car sales are rising.
\n General Motors
\n (ticker: GM) delivered 981,000 vehicles in the third quarter, up from 979,000 delivered in the second quarter and up from 966,000 units delivered in the third quarter of 2022. <\/p>\n

\n

The bit about car sales being up is tongue-in-cheek. If things were normal, car sales would be slowing from higher levels. Americans are likely to buy about 15 million new cars in 2023. Pre-pandemic sales were closer to 17 million units. <\/p>\n

What\u2019s more, GM is earning less on higher car sales. Operating profit in the third quarter amounted to $3.6 billion, down from $4.3 billion in the third quarter of 2022. That\u2019s odd too since profits typically peak with car sales. <\/p>\n

Then there is the aerospace industry. As things slow down, orders for
\n General Electric
\n \u2018s (GE) jet engines and related services have jumped 34% year over year. After GE reported third-quarter numbers Tuesday, CEO Larry Culp told Barron\u2019s<\/em> that commercial aerospace was in a post-pandemic boom. <\/p>\n

Booming amid a slowing economy is a little odd. But the pandemic depressed commercial air travel, so that part is understandable. Still, GE\u2019s Aerospace profit margins aren\u2019t normal, coming in for the third quarter north of 20%. <\/p>\n

That\u2019s exceptionally strong. It might not feel weird, but GE is supposed to be seeing margin pressure from shipping more new engines as the aerospace business heats up. New engines are essentially sold at cost or a loss and the profit is made on parts and service. There is nothing alarming about that\u2014it\u2019s the way the industry works. <\/p>\n

Part of the reason GE\u2019s margins are so strong is that despite a \u201cboom\u201d both
\n Boeing
\n (BA) and
\n Airbus
\n (AIR.France) are having a terrible time ramping up production amid persistent supply-chain problems. The pair is forecast to deliver less than 1,300 new planes in 2023. They delivered more than 1,600 in 2018. Deliveries aren\u2019t expected to exceed 2018 levels until 2025. That means more spare engines and parts and higher profits than GE would likely be seeing if things were \u201cnormal.\u201d<\/p>\n

While GE is booming, a competitor is stumbling.
\n RTX
\n (RTX) ran into a quality problem with one of its jet engines. Its jet engine division posted third-quarter operating profit margins of 6.5%. Pre-pandemic, margins were closer to 9%. <\/p>\n

A difference between GE and RTX is that General Electric has more aftermarket parts business, said Vertical Research Partners analyst Rob Stallard. <\/p>\n

Investors might feel like throwing up their hands in frustration. This economic backdrop is too strange. The old playbook that suggests selling stocks that are relatively more impacted by the economy, such as aerospace or car stocks, won\u2019t work. <\/p>\n

There still are sensible strategies that will work, however. Just buy quality and don\u2019t pay too much. Aerospace, traditionally, has been a good business. <\/p>\n

For the aerospace players, just look at 2025 or 2026 earnings (and again\u2014don\u2019t pay too much). GE and Boeing are trading at about 15 or 16 times estimated 2026 earnings. RTX is trading at 10 times. When things were better, in 2018, they all traded at about 15 times estimated 2021 earnings. It\u2019s strange to look out as far as 2026, but, well, things are strange right now. Overall, valuations look OK. RTX is priced for a turnaround. If investors believe RTX will fix things that\u2019s the bet. But they shouldn\u2019t feel bad about holding Boeing or GE shares either. <\/p>\n

Auto stocks are a little different. \u201cThe average investor needs to understand that the entire industry will be under stress for many years as every [traditional auto maker] struggles with the transition to EVs,\u201d said DataTrek Research co-founder and former auto analyst Nicholas Colas. \u201cAuto stocks are trades,\u00a0not investments. You buy them when things look terrible in terms of demand and sell them when things look good.\u201d <\/p>\n

Demand isn\u2019t terrible, but GM stock trades at less than 5 times estimated earnings amid rising rates and fear over the United Auto Workers strike. That could be terrible enough, but investors should remember those stocks haven\u2019t produced consistent returns over time. <\/p>\n

GM has declined about 13% over the past five years. The
\n S&P 500
\n has risen 60% over the same span. <\/p>\n

Boeing stock has dropped 50% over the past five years, worse than GM, but it was up roughly tenfold in the 10-year stretch ending just before the second tragic 737 MAX crash that ground the plane for almost two years starting in March 2019. Investors hope this is the start of another run like that coming out of the Covid-19 pandemic. <\/p>\n

Write to Al Root at\u00a0allen.root@dowjones.com<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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