GE Aerospace Earnings: Firm Setting Up Some Steep Milestones

Key Morningstar Metrics for GE Aerospace

• Fair Value Estimate
  : $350.00
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of GE Aerospace’s Earnings

GE Aerospace’s GE commercial engines segment revenue grew 21% year over year with a 28% operating margin in the third quarter. Defense revenue grew 7%, with a 14% margin. Management again raised its full-year revenue and profit expectations amid macroeconomic turbulence and industry uncertainty.

Why it matters: Notwithstanding a spike in jet fuel prices and geopolitical jitters related to war in and around Iran, persistent global aircraft utilization and fewer recent retirements of older jets in recent months led the commercial aftermarket business to grow 26% year to date.

• The company shipped 64 more commercial engines in the third quarter than last year, including 51 more in the LEAP family. New engine deliveries generally provide lower margins than aftermarket sales, but commercial margins remained healthy, nearing 28%.

The bottom line: We have raised our fair value estimate for wide-moat GE Aerospace to $350 per share from $347 due to the time value of money and a slightly steeper medium-term aftermarket margin growth trajectory. The shares trade within 14% of our fair value estimate, though we anticipate the firm will continue enhancing its dividend and share-repurchase programs.

Bears say: Investors are concerned that a wave of older aircraft (and their engines) that have seen prolonged use while new aircraft deliveries stagnated in the post-pandemic supply chain crunch will cause a steep dropoff in aftermarket aerospace. This has weighed on GE and related companies’ shares.

• While aircraft retirements usually average 2%-3% of the fleet annually, and only 1%-2% of jets have been retired for several years, leaving some 800 or more jets in service that might otherwise have been redeployed or scrapped, we think the thesis is overwrought.
• When retirements start catching up to normal pace—because of the long-term nature of aircraft service planning—our forecast does not entail a steep drop in aftermarket revenue, but rather a deceleration of recent growth.