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Key Morningstar Metrics for GE Aerospace
- Fair Value Estimate: $167.00
- Morningstar Rating: 3-Star
- Morningstar Economic Moat Rating: Wide
- Fair Value Uncertainty: Medium
For years, General Electric stock was dead money. With the company now known as GE Aerospace [GE], its share price has taken flight, gaining 86% over the last 12 months, with a more than 50% gain in 2024 so far. The fuel for this rally has come from multiple sources, according to Morningstar equity analyst Nicolas Owens:
- The good fundamental performance of the aerospace business
- The spinoffs of the healthcare and energy businesses
- Growing investor appreciation for the firm’s prospects
Since its spinoffs, GE Aerospace has had more “focus and financial freedom,” Owens says.
GE Stock’s Boom, Bust, and Boom Again
In the 1980s and ‘90s, GE was an investor darling under chief executive Jack Welch, with its share price rising around 10,000% to nearly $300 per share. However, the stock spent the next two decades in a slump, bottoming out at around $30 per share in 2020.
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.”
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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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