GE Aerospace Earnings Preview: Navigating Supply Chain Constraints

GE Aerospace (GE) is poised to release its Q3 earnings report, with the market closely watching for signs of continued profitability amid ongoing supply chain challenges. The company’s stock has nearly doubled year-to-date, reflecting investor optimism fueled by the last two robust quarterly earnings reports. The Q3 earnings call is scheduled for tomorrow, with management providing insights into their performance at 7:30 a.m. ET.

Analysts are expecting earnings per share (EPS) of $1.13 and revenues of $9.02 billion, according to FactSet consensus estimates.

Recent Performance and Market Momentum

GE Aerospace has been on an upward trajectory since spinning off GE Vernova in April, reporting two strong quarters that have helped boost the company’s valuation to near all-time highs. Despite modest revenue growth of 3.9% in Q2, the company impressed investors with a substantial earnings beat and marked improvement in profitability.

GE’s operating margins expanded by an impressive 560 basis points year-over-year to reach 23.1%, underscoring the company’s focus on optimizing operations and cost efficiency.

A significant driver behind GE’s performance has been the rising demand for its LEAP engines and related services, particularly as shop visits and engine deliveries have grown. Orders increased by 18% year-over-year in Q2, suggesting a healthy demand environment despite the revenue constraints posed by supply chain issues.

Supply Chain Challenges and Adjusted Revenue Growth Outlook

Supply chain disruptions remain a critical area of focus as GE Aerospace navigates the second half of 2024. The company acknowledged in its Q2 report that while profitability is expected to accelerate, these constraints are anticipated to persist, especially concerning the LEAP engines that make up a substantial portion of GE’s commercial engine deliveries.

In Q2, the supply chain bottlenecks led to a 29% year-over-year decline in shipments across narrowbody and widebody engines, directly affecting revenue growth.

This persistent supply chain disruption is reflected in GE’s revised full-year 2024 revenue guidance, which was adjusted to high single-digit growth, down from the earlier projection of low double digits. Despite this moderation in revenue expectations, GE’s confidence in its profitability led to an upward revision of its adjusted EPS forecast for FY24 to a range of $3.95-$4.20, up from the previous guidance of $3.80-$4.05.

Q3 Earnings Expectations and Key Risks

For Q3, analysts and investors will closely examine how supply chain constraints have impacted GE’s output, particularly the delivery of LEAP engines. Any indication that GE is effectively managing or alleviating these bottlenecks could boost investor confidence. Conversely, a further decline in engine deliveries or continued supply chain issues may temper enthusiasm, especially given the stock’s proximity to all-time highs.

GE’s relationship with its key partners, Boeing (BA) and Airbus (EADSY), will be particularly important in assessing the company’s ability to meet engine delivery targets. The recent tentative agreement between Boeing and the International Association of Machinists (IAM) to end the strike may come too late to prevent some negative impact on GE’s Q3 numbers.

However, GE’s ability to service engines from both Airbus and Boeing offers some flexibility to mitigate potential shortfalls resulting from issues at Boeing.

Profitability as a Counterbalance to Supply Chain Pressures

Despite the revenue constraints, GE Aerospace’s profitability remains robust, and this strength is expected to persist in Q3. The company has demonstrated its capacity to offset slower revenue growth with healthy profit margins, leveraging its strong position in the LEAP engine market. The ongoing demand for LEAP services, alongside improving operational efficiencies, has allowed GE to maintain its momentum and strengthen its bottom line.

Investors will be looking for further evidence of this trend in the Q3 results. A repeat of the Q2 pattern—where profitability outshines tepid revenue growth—could serve as a catalyst for pushing the stock to new highs. Given GE’s current valuation, however, even minor disappointments in profitability or delivery targets could lead to a pronounced market reaction.

Investors will be looking for further evidence of this trend in the Q3 results. A repeat of the Q2 pattern—where profitability outshines tepid revenue growth—could serve as a catalyst for pushing the stock to new highs. Given GE’s current valuation, however, even minor disappointments in profitability or delivery targets could lead to a pronounced market reaction.

Conclusion

GE Aerospace is at a critical juncture as it prepares to release its Q3 earnings report. While the company has successfully navigated profitability concerns and boosted margins, supply chain constraints remain a significant obstacle that may influence short-term performance.

The market’s high expectations, reflected in the company’s stock price nearing record levels, suggest that any missteps could be met with sharp declines. Conversely, if GE manages to show improvement in engine deliveries and profitability despite the challenges, the stock may extend its impressive year-to-date gains.

Ultimately, GE’s ability to balance profitability against supply chain headwinds will be pivotal in determining its short-term trajectory. Investors will be watching closely to see if the company can capitalize on strong demand and effectively manage its operational challenges, setting the stage for further growth in the quarters to come.