GE Aerospace: Buy, Sell, or Hold?

GE Aerospace (GE -1.04%) has had an excellent beginning as an independent company. The market has quickly responded by assigning it a premium rating, driven by strong operational performance and the promise of a long-term revenue stream from services related to its aircraft engines installed in airline fleets. But is the stock worth buying now? Here's the lowdown.

GE Aerospace stock analysis

As you can see from a pair of standard valuation metrics below, the market is willing to pay a high multiple to get exposure to GE Aerospace's long-term growth. As a rough assumption, a price-to-earnings (P/E) ratio of around 15 times earnings and an enterprise value (market cap plus net debt) to earnings before interest, taxation, depreciation, and amortization of around 11 times EBITDA can be seen as a decent value for a mature company.

Image source: Getty Images.

However, GE Aerospace's forward valuations are significantly more than those figures. Its dominant position in the commercial airplane engine industry is the reason. Its joint venture with Safran, CFM International, makes the LEAP engine the sole engine on the Boeing 737 MAX and one of two provided on the Airbus A320 neo family. Moreover, the CFM56 is the sole option for the later models of the legacy 737 and is one of two main options for the legacy A320 family. More importantly, GE's dominance doesn't stop in the narrowbody market. The GE90 engine runs the Boeing 777, and the GE9X will be the sole engine on the 777X. GE engines also power the Boeing 747, 787, and Airbus A330 widebodies.

The typical business model in the industry involves selling engines at a low loss only to generate multiple decades of service/aftermarket revenue as engines come in for "shop visits" over their lifetime, whereby they are overhauled and maintained. In a nutshell, the market is paying for future earnings based on its dominant position and the growth in flight departures (and ultimately engine use) rather than GE's near-term earnings prospects.

GE EV to EBITDA (Forward) data by YCharts

The state of the industry in 2024

It's been an unusual year for the industry. Flight departures have generally surpassed expectations, and GE Aerospace has had an excellent year with services in terms of revenue growth, margins, and orders. That led the company to raise its full-year 2024 earnings guidance through the year gradually.

That supported the stock price and gave investors hope that excellent service performance could continue into 2025.

GE Aerospace

At January At April At July At October

Commercial Engines & Services (CES) segment profit $6 billion to $6.3 billion $6.1 billion to $6.4 billion $6.3 billion to $6.5 billion $6.6 billion to $6.8 billion

Defense & Propulsion Technologies (DPT) segment profit $1 billion to $1.3 billion $1 billion to $1.3 billion $1 billion to $1.3 billion $1 billion to $1.3 billion

Total GE Aerospace operating profit $6 billion to $6.5 billion $6.2 billion to $6.6 billion $6.5 billion to $6.8 billion $6.7 billion to $6.9 billion

Data source: GE Aerospace presentations.

Moreover, as discussed elsewhere, GE's management raised expectations for shop visit growth on its older CFM56 engine in the 2026 and 2027 time frames. The delays in production ramps at Airbus and Boeing mean older planes and engines like the CFM56 will be run more.

Is GE Aerospace a good value?

There's no doubt that GE Aerospace continues to have excellent momentum. Still, a couple of concerns might cause a pause before buying the stock, particularly given its current valuation. First, and going back to the table above, while management maintained its DPT segment guidance on the last earnings call in October, CFO Rahul Ghai told investors, "We expect DPT to be at the lower end of the current profit range of $1 billion to $1.3 billion." This walking back of guidance is somewhat concerning, given the margin challenges faced by most defense contractors in recent years due to rising costs and problematic contracts.

Second, supply chain issues and cost pressures have been impacting GE Aerospace's near-term earnings and valuation, as evidenced by the company's guidance for LEAP engine deliveries in 2024. In January 2024, GE Aerospace expected LEAP deliveries to grow by 20% to 25% year over year. However, by October 2024, the company had significantly lowered its expectations, with LEAP deliveries now expected to decrease by 10% year over year (GE Aerospace presentations). This reduction in LEAP engine output is not a significant problem for near-term earnings, as engines are typically sold at a loss. However, it could become a cost issue in 2025, as GE Aerospace aims to ramp up LEAP engine production to meet the aggressive production plans of Airbus and Boeing (GE Aerospace presentations).

In conclusion, while GE Aerospace continues to have excellent momentum, investors should be cautious when considering the stock, as it is priced for perfection. It makes sense to wait for management's formal guidance for 2025 before making a decision.