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

GE Aerospace released its second-quarter earnings report on July 23. Here’s Morningstar’s take on GE Aerospace’s earnings and the outlook for its stock.

Key Morningstar Metrics for GE Aerospace

• Fair Value Estimate: $170.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of GE Aerospace’s Q2 Earnings

• Overall, it is important to recognize what a strong franchise GE Aerospace has. Its long cycle of recurring and highly profitable revenue from high-value engine maintenance is a great example of a moat in operation. This gigantic version of the “razors and blade” model works well for GE, as the firm’s investments in its current engine models are paying off.
• Some supply chain disruption—lingering postpandemic headaches that many manufacturers are still battling—caused GE to deliver fewer of its new LEAP engines. But because new models like LEAP are initially unprofitable until many more units have been delivered, the rest of the business’ higher margin shone through. Airlines using older planes longer may also benefit GE, as it will likely get more service revenue from the older engines to extend their service lives as airlines wait for delayed new planes and engines.
• GE Aerospace’s moat is incredibly wide, considering how long it can earn economic profits. Engines fly for 20-plus years, and an engine family can be produced for decades more. 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.

Fair Value Estimate

With its 3-star rating, we believe GE Aerospace’s stock is fairly valued compared with our long-term fair value estimate of $170 per share, representing an enterprise value/2024 EBITDA ratio of just under 24 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 economic moat.

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. We expect GE Aerospace’s EBITDA to grow and think the company’s credit ratings are likely to improve over time. Its securities portfolio of over $40 billion secures the similarly valued liabilities of the legacy long-term-care insurance portfolio. Only in an improbable scenario would we foresee the insurance book draining the firm’s resources.

We expect GE Aerospace to eventually wind down or dispose of its real estate and long-term-care insurance portfolios, the remnants of conglomerate GE still on the books. Until then, a remote financial risk remains, should payouts from long-term-care policies outstrip the reserves GE has put aside to cover them.

Read more about GE Aerospace’s 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.

More important to the core business are two operational risks. Complex manufacturing is subject to supply chain risk, in the form of the materials needed to build or service an engine and the people who do the work. Future supply chain bottlenecks or workforce disruption could mar the company’s revenue and profitability in one or more product lines at almost any time.

A more pernicious risk to long-term profitability would be posed by a potential systemic flaw in one of the company’s engine designs or manufacturing quality. Pratt & Whitney saw this with a metallurgy flaw in its GTF engine, which resulted in over $3 billion in cash charges. Since a good portion of GE’s engines are serviced on long-term contracts, the company assumes most of the risk of cost overruns from unforeseen repairs.

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 Krutang Desai