After Earnings, Is GE Aerospace Stock a Buy, a Sell, or Fairly Valued?

Ge Aerospace GE released its first-quarter earnings report on April 23. Here’s Morningstar’s take on GE Aerospace’s earnings and outlook for its stock.

Key Morningstar Metrics for GE Aerospace

• Fair Value Estimate: $167.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of GE Aerospace’s Q1 Earnings

• Overall, we think it is important to recognize GE Aerospace’s amazing franchise. The long cycle of recurring and highly profitable revenue from high-value engine maintenance is a great example of a moat in operation. It is a gigantic version of the razor-and-blades model we associate with Gillette in the 1970s: Give away the razor and charge up for the blades.
• We also think GE has an edge over Pratt RTX and potentially Rolls Royce RYCEY and even Safran SAFRF in its ability to fund and reap rewards from ongoing research and development over the decades, whereby innovations can be applied to more than one engine family.
• The moat is incredibly wide, considering the likely time during which the company can earn economic profits. Engines fly for 20+ years, and an engine family can be produced for decades longer. The CFM56, which powers older 737s and A320s, went into service in 1982 and was still produced until last year; there are 20,000 in the air today, and this model will be flying and generating service revenue for GE for quite some time.
• The valuation story in the quarter was management raising its margin expectations, and we think this could become a recurring theme. In our model, we see a pathway to wider margins than the company is talking about, because they are beyond 2028.

Fair Value Estimate for GE Aerospace

With its 3-star rating, we believe GE Aerospace’s stock is fairly valued compared with our long-term fair value estimate of $167 per share, representing an enterprise value/2024 EBITDA ratio of just under 27 times. With GE’s engines powering nearly three-fourths of global commercial flights, the company’s biggest profit driver is simply more airplanes continuing to take off and land.

Read more about GE Aerospace’s fair value estimate.

Economic Moat Rating

GE Aerospace meets our highest standard of a wide-moat business; it was the crown jewel of the GE conglomerate. We believe it will outearn its cost of capital by a comfortable margin for at least the coming 20 years. We assign GE Aerospace a wide moat rating on switching costs and intangible assets stemming from its massive installed base of aircraft engines and the complex technical know-how it takes to design, produce, and maintain them.

GE competes in a virtual duopoly in the wide-body (twin-aisle) jet engine market against Rolls-Royce and in the narrow-body (single-aisle) market against Pratt & Whitney. Including its 50% interest in the CFM joint venture with Safran, GE participates in three-fourths of the commercial jet engine market, as measured by its installed base of more than 40,000 commercial engines.

Crucial to GE Aerospace’s moat is that engines typically fly for more than 20 years, and the company’s commercial and engine services business (representing about 75% of total revenue) makes 70% of that revenue from servicing its engines. This means GE Aerospace alone commands approximately 40% of the global engine maintenance, repair, and overhaul market.

Read more about GE Aerospace’s moat rating.

Financial Strength

As of year-end 2023, and accounting for the spinoff of GE Vernova GEV, GE Aerospace’s net debt amounted to $7 billion, close to 1 times 2023 EBITDA coverage and lower than many aerospace peers. The company announced its plan to return 100% of free cash flow to shareholders over the next three years through a mix of dividends and share buybacks. We don’t have a problem with the company maintaining current debt balances to do so.

Read more about financial strength.

Risk and Uncertainty

We assign GE Aerospace a Medium Uncertainty Rating, in line with our broader aerospace coverage. The company bears some remote financial and ongoing operational risk to its manufacturing and service business.

From an environmental, social, and governance standpoint, we think GE faces a few risks that by now are well-known to investors, including government investigations into and oversight of its trade practices, shareholder lawsuits, and potential embargoes from defense sales. However, we think the greatest ESG risk relates to the climate impact from aerospace engines, though we don’t think this is enough to be material and point out that GE is developing a next-generation sustainable engine in its CFM Rise program.

If any of these risks materialized (as they have for Airbus in the case of export rule infractions and Boeing BA and Pratt & Whitney regarding quality lapses and customer remuneration), they would be financially quantifiable and finite. They would not undermine the company’s intangible assets or switching costs, in our view.

Read more about GE Aerospace’s risk and uncertainty.

GE Bulls Say

• Bears vastly underestimate the incremental profits GE will make from operating leverage as commercial aerospace fully recovers and its Leap engine aftermarket program enters its profitable phase.
• The Leap engine is installed on a growing majority of the popular Airbus A320neo family, compounding GE’s prospects for decades of profitable service revenue from its large installed fleet of engines.
• Even the fleet of older engines like the GE90, which went into service in 1995 and powers about half of Boeing 777s, has yet to see most of its shop visits to GE.

GE Bears Say

• Burgeoning demand for its engines could strain GE Aerospace’s manufacturing and supply chain, not just frustrating customers but hampering efficiency.
• Engines sold with long-term service contracts effectively transfer risks to the manufacturer, resulting in higher-than-anticipated maintenance costs, which could mar the program’s profitability.
• A faint risk remains that GE’s reserves for legacy long-term-care reinsurance will be exhausted and drain cash flow.

This article was compiled by Liz Angeles.