GE Aerospace: Overvalued Now or Undervalued for the Long Haul?

The aerospace sector is at a crossroads. While GE Aerospace (GE) delivered a stellar Q1 2025 performance—operating profit surged 38% to $2.1B, and its commercial services backlog now exceeds $140B—skeptics argue the stock is overvalued amid rising trade tensions and supply chain risks. Is this a time to sell, or is GE’s structural growth in defense and aftermarket services masking undervalued potential? Let’s dissect the risks and rewards.

The Bull Case: Backlog Strength and Defense Dominance

GE’s Q1 results are undeniable. The company’s $170B+ total backlog—driven by $5B in U.S. Air Force defense contracts and a 60% jump in LEAP engine aftermarket shop visits—provides a 5-year visibility buffer for revenue. Management’s confidence is reflected in reaffirmed 2025 guidance: $7.8–$8.2B in operating profit and $6.3B+ free cash flow.

The defense segment, often overlooked, is a hidden gem. Despite modest 5% growth in defense unit deliveries, operating profit surged 16% to $296M, fueled by high-margin military engine programs like the T901 and XA102. With geopolitical tensions driving global defense spending, this segment could become a recession-resistant cash generator.

Meanwhile, the commercial services backlog—90% of Q2 spare parts orders already secured—suggests pricing power. Even as airline departures growth slows to “low single digits,” GE’s aftermarket contracts are insulated from near-term demand dips.

The Bear Argument: Valuation and Tariff Headwinds

Critics, like Northcoast Research, argue GE is overvalued at 17x 2025E EPS versus its 10-year average of 14x. Their downgrade cites $500M annual tariff drag and risks from spare parts delinquency (up 200% Y/Y) and slowing LEAP engine deliveries. Supply chain bottlenecks, exacerbated by U.S.-China trade tensions, could further strain margins.

The $3.7B GuruFocus downside target (37% below current prices) hinges on a worst-case scenario: a global recession derailing airline capital spending and defense contracts. If spare parts backlogs persist, GE’s aftermarket revenue could falter, undermining its cash flow thesis.

The Contrarian Play: Long-Term Tailwinds Outweigh Near-Term Noise

While risks are real, they’re priced into the stock. Consider:
1. Defense secular growth: U.S. military modernization and international demand for advanced propulsion systems (e.g., F110 engines) offer $10B+ in pipeline opportunities.
2. Aerospace recovery: Post-pandemic demand for narrow-body engines (LEAP) and wide-body tech (GE9X) is structural. Boeing and Airbus’ $1.2T order backlogs ensure steady engine demand.
3. Margin expansion: GE’s FLIGHT DECK initiative—which boosted material inputs by 8%—proves operational discipline can offset tariffs. Pricing power in aftermarket services (up 20% in spare parts) adds margin resilience.

Final Verdict: Hold for the Long Game

The data suggests hold, not sell. While near-term risks justify caution, GE’s backlog, defense moat, and $6.3B+ free cash flow guidance position it to outperform peers in a downturn. For long-term investors, the 17x P/E multiple is reasonable given its 10%+ annual revenue growth runway.

Action Items:
- Hold if: You can tolerate volatility and believe aerospace demand remains resilient.
- Reduce exposure if: Tariffs escalate beyond $500M annually or spare parts delinquency worsens.

In a sector where few companies command $170B backlogs, GE’s fundamentals warrant patience. This isn’t a high-risk gamble—it’s a bet on an industrial titan with a fortress balance sheet and secular tailwinds.