GE Aerospace GE released its third-quarter earnings report on Oct. 22. Here’s Morningstar’s take on GE Aerospace’s earnings and stock.
Key Morningstar Metrics for GE Aerospace
- Fair Value Estimate: US$194.00
- Morningstar Rating: 3 stars
- Economic Moat: Wide
- Morningstar Uncertainty Rating: Medium
What We Thought of GE Aerospace’s Q3 Earnings
- GE Aerospace reported third-quarter earnings very close to our expectations for segment revenue and profit performance, and management slightly raised 2024 guidance for most of its metrics.
- We raised our fair value estimate to US$194 per share from US$192, primarily for the time value of money and an in-line quarter. Commercial performance more than made up for the soft spot in defense in our forecast.
- While the delivery schedule for GE9X has slipped along with Boeing’s BA delayed launch, GE has already begun delivering the first engines off the line. We forecast GE will cross the 250th GE9X engine mark by early 2030 in any case and achieve profitability on the program soon after.
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 US$194 per share, representing an enterprise value/2024 EBITDA ratio of just under 28 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.
Given its portfolio of newer engines entering service, we see decades of sales and eventual profitability growth from manufacturing new engines in the medium to long term, while the company’s older workhorse engines should still provide over a decade of healthy profits, primarily from aftermarket engine services. We forecast 16.2% compound revenue growth from manufacturing over the next decade, after a relatively flat 2024. In the larger commercial aftermarket business, we see 5.4% compound revenue growth over 10 years, but with improving margins over time. Including the defense and propulsion segment, we forecast 8.4% compound revenue growth for GE Aerospace through 2033.
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. 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 US$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 US$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 Kayleigh Hall.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
