GE Aerospace Stock Has Skyrocketed 86%. Is It a Buy?

On
November
9,
2021,
GE
announced
it
was
splitting
in
three,
with
the
original
company
becoming
GE
Aerospace.
The
first
spinoff,
GE
HealthCare
Technologies
[GEHC],
debuted
on
Jan
3,
2023,
and
on
April
2,
2024,
the
company’s
green
energy
businesses
became
GE
Vernova
[GEV].

This
move
has
worked
well.
GE
HealthCare
is
up
31%
since
its
spinoff,
while
Vernova
is
up
25%.
But
the
biggest
boom
has
been
for
shareholders
in
the
original
company’s
stock.
Since
the
November
2021
announcement,
GE
Aerospace
is
up
163%,
while
the
broader
stock
market
as
measured
by
the
Morningstar
US
Market
Index
is
up
roughly
39%.

Why
Is
GE
Rallying?

Owens
says
the
rally
can
be
traced
to
the
strength
of
GE’s
core
business,
the
post-pandemic
climate,
and
the
spinoff
strategy.
“The
company
has
a
strong
track
record
of
making
dependable
jet
engines
that
airlines
need
to
power
their
planes,”
he
explains.
He
notes
that
GE
generates
revenue
not
just
by
selling
engines,
but
also
by
servicing
them
over
the
decades
in
which
they
are
in
use.

More
recently,
“the
backdrop
of
the
extremely
steep
rebound
in
air
travel
after
the
covid
pandemic
means
that
new
engines
and
service
on
older
ones
are
both
in
strong
demand,”
Owens
says.
“We
expect
demand
to
remain
very
solid
for
many
years,
even
after
the
post-pandemic
demand
jump
normalizes,
because
globally
and
historically,
as
people
experience
more
economic
development
and
activity,
they
want
to
travel
more,
and
demand
for
air
travel
correlates
very
strongly
with
[economic]
growth.”

The
Benefits
of
the
Spinoffs

“The
GE
spinoffs
removed
some
financial
constraints
from
the
underlying
aerospace
business,
which
is
now
free
to
pursue
its
goals
and
reap
the
results
without
having
to
contribute
financing
or
investment
into
the
healthcare
or
energy
businesses,”
Owens
explains.

“Partly
by
removing
distraction
and
a
potential
drain
of
financial
resources,
but
also
by
leaving
a
clearer
picture
for
investors
of
those
strengths
in
the
aerospace
business,
the
Vernova
spinoff
was
a
plus,”
he
says.
He
continues:
“Fundamentally,
GE’s
engine
business
is
the
strongest
of
the
former
GE
conglomerate’s
portfolio.
That
business
is
now
able
to
focus
on
the
best
part,
and
investors
have
come
to
appreciate
what’s
good
about
the
jet
engine
business.”

Will
GE
Increase
Its
Dividend?

Historically,
GE
stock
was
favored
among
dividend
investors.
In
2008,
it
was
paying
an
annual
dividend
of
$1.24
per
share.
However,
as
the
company
struggled
financially,
it
cut
its
dividend
multiple
times,
until
in
2018
it
took
the
annual
payout
down
to
4
cents
per
share.
Now
the
dividend
is
back
up
to
24
cents,
and
Owens
thinks
it
could
continue
to
rise.

“GE
management
has
stated
it
aims
to
return
70%-75%
of
‘available’
cash
to
investors—which
we
interpret
as
likely
very
close
to
free
cash
flow—and
I
don’t
doubt
increasing
the
dividend
over
time
will
play
a
big
part
of
that,
along
with
share
buybacks,”
he
says.
“The
very
long-term,
profitable,
and
predictable
nature
of
the
jet
engine
service
business
is
highly
compatible
with
a
generous
dividend
policy.”

GE
Stock
Valuation

At
roughly
$163,
the
stock
fairly
valued
to
Owen’s
fair
value
estimate
of
$167.00.
It
lands
in
3-star
territory.

“We
have
raised
our
fair
value
estimate
for
GE
from
$152
to
$167
on
April
23,
and
the
stock
has
grown
into
that
valuations
quite
swiftly,”
Owens
says.
“At
recent
prices,
I
see
the
shares
as
fairly
valued,
and
I
think
GE
Aerospace
has
a
lot
of
potential
to
continue
to
compound
returns
for
shareholders
over
time.”

>

The
following
are
highlights
of
Nicolas
Owen’s
Dunlop’s
outlook
for
GE
Aerospace
and
its
stock.
More
of
his
coverage
of
GE
is

available
here.

Economic
Moat
Rating

We
believe
GE
Aerospace
has
a
wide
moat.
The
firm
powers
three
of
every
four
commercial
airline
flights,
making
it
a
“formidable
and
focused
turbine
engine
producer,”
according
to
Owens.
“GE’s
customer
switching
costs
result
from
the
strong
integration
of
the
engines
and
their
associated
equipment
into
customers’
airframes
and
maintenance
choices.”
Additionally,
risk
aversion
plays
into
customers’
reluctance
to
switch
from
a
proven
engine.
Unplanned
downtime
related
to
concerns
about
an
engine’s
efficacy
can
wreak
havoc
for
airlines.
The
high
cost
of
a
failure
is
enough
to
cement
customer
loyalty.

Read
more
about
GE
Aerospace’s
economic
moat.

Financial
Strength

We
assess
GE
Aerospace’s
financial
strength
as
healthy.
The
company
targets
an
enterprise
value/2024
EBITDA
of
just
under
27
times,
with
its
biggest
profit
driver
being
global
commercial
flights.
Our
calculations
suggest
decades
of
sale
and
profitability,
as
newer
engines
enter
service
alongside
older
workhorses.
Morningstar
analysts
forecast
8.8%
compound
revenue
growth
from
manufacturing
over
the
next
decade.

GE
Aerospace
is
set
to
see
mid-teens
revenue
growth
in
2024
leveling
off
to
6.6%
compound
growth
over
10
years.
Jet
engine
manufacturing
is
capital-intensive,
and
we
expect
expenditures
and
R&D
spending
to
total
$16
billion
over
the
next
10
years.

Read
more
about
GE
Aerospace’s
financial
strength.

Risk
and
Uncertainty
We
assign
GE
Aerospace
a
Medium
Uncertainty
Rating.
The
firm
remains
strengthened
by
consumer
loyalty.
However,
it
bears
operational
risks
from
the
materials
needed
to
build
or
service
engines,
and
the
people
who
do
the
work
present
supply
chain
risk.
Additionally,
supply
chain
bottlenecks
or
the
disruption
of
the
workforce
could
mar
the
company’s
revenue
and
profitability.

An
engine
company
is
of
course
also
subject
to
environmental,
social,
and
governance-related
risks.
There
could
be
government
investigations
into
its
trade
practices,
shareholder
lawsuits,
or
potential
embargoes
from
defense
sales.
We
think
the
greatest
ESG
risk
relates
to
fallout
from
the
climate
impact
of
aerospace
engines,
though
we
don’t
think
this
is
enough
to
be
material.

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.

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