Here’s what General Electric’s aerospace business is worth

By | March 17, 2024

The stock of General Electric (NYSE: GE) is up 85% in the past year, demonstrating growing investor confidence in the company’s upcoming restructuring. As GE Vernova (the energy, renewable energy and electrification company) prepares to hit the market on April 2, the remaining entity, GE Aerospace, has significant potential.

Despite its impressive performance, is the stock still a value proposition? Let’s dive into the details.

The breakup of General Electric

As I previously highlighted in an extensive analysis, GE Vernova’s market cap is conservatively estimated at around $27.3 billion. However, the current value of GE stock is approximately $183 billion. Despite the fact that the $27.3 billion estimate for GE Vernova is conservative (meaning it’s a good investment at that level), is the implied $155.7 billion a reasonable valuation for GE Aerospace?

Why General Electric shares have soared

There’s little doubt that the market has revalued the GE Aerospace part of the business over the past year, and I think there are a few reasons for that:

  • GE Aerospace has outperformed other major commercial aviation giants such as RTX And Boeing.

  • The company is also less exposed to some of the margin and supply chain issues in the defense industry that have affected and continue to affect RTX. Lockheed Martinand, to some extent, Boeing.

  • Investors stopped pricing GE as an industrial conglomerate and started thinking of the company as “GE Aerospace+GE Vernova” and valued it accordingly (aerospace companies tend to trade at valuation premiums to industrial companies).

GE Aerospace’s rival engine manufacturer RTX (the two offer competing engines on the Airbus The A320 neo family) had a disappointing 2023 after the discovery of possible contamination of the powder coating used in turbine discs on its engines, requiring engines to be removed inspected, resulting in billions in damage to profits and cash flow.

In addition, RTX’s defense business remains under pressure from delivering on fixed-price development programs signed during times of lower inflation (Boeing and Lockheed Martin also face this problem).

Meanwhile, Boeing’s commercial aerospace division has no shortage of problems, with questions surrounding when production will ramp up and, more importantly, the kind of profit margin it will achieve. In contrast, GE Aerospace’s lack of problems has made it a favorite stock in the major aerospace sector.

An airplane in flight.An airplane in flight.

Image source: Getty Images.

GE Aerospace rating

As noted above, aerospace companies trade at a valuation premium to industrial companies to reflect the long-term profits and cash flows from their service revenues. For example, the aircraft engine model (GE and RTX both follow this) is focused on selling engines at a loss just to generate decades of parts and service revenue with higher margins.

As such, when equipment deliveries increase (as is currently the case with the LEAP engine on the Airbus A320 neo family and the Boeing 737 MAX, the GEnx engine on the Boeing 787 and in the future the GE9X on the Boeing 777X), Profitability is low compared to what it will be once the engines are in service for a few years and the revenue mix shifts to higher margin parts and services.

As such, no one is praising GE Aerospace for what it is now, but rather for what its future earnings and cash flow will be. For example, my estimate for GE Aerospace’s implied value of $155.7 billion means that GE Aerospace is valued at 31.1 times management’s estimate for 2024 free cash flow (FCF), as shown below.

GE Aviation

2023

2024

2025

Adjusted turnover

$32 billion

Low double-digit growth

Low double-digit growth

Operating result

$5.6 billion

$6 billion to $6.5 billion

$7.1 billion to $7.5 billion

Free cash flow

$4.7 billion

$5 billion

More than 100% net income conversion

Data source: GE Aerospace Presentations.

It’s an extremely high figure for an industrial conglomerate, but comparable to the valuations assigned to other aerospace-focused companies (see chart below). Additionally, keep in mind that GE Aerospace will experience some margin pressure in the coming years as engine deliveries increase and their share of the revenue mix grows. In other words, GE’s short-term profits and cash flow do not reflect its long-term potential.

HEI price to free cash flow chartHEI price to free cash flow chart

HEI price to free cash flow chart

Is General Electric still good value for money?

Based on the numbers above, it appears that GE is almost fully valued. One Wall Street analyst thinks there is still single-digit upside potential for the stock price, which looks reasonable even if unexciting.

That said, GE’s valuation may have been boosted by the perception that it is a “go to” stock in the aerospace and defense sector in light of the problems with Boeing, RTX and Lockheed Martin. That could change if the three start to improve operationally.

The best way to consider the investment opportunity is to look at the value of GE Vernova and GE Aerospace after the spin. Anything under $27.3 billion for GE Vernova is an excellent value opportunity, while under $155.7 billion for GE Aerospace offers a small upside.

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Lee Samaha has no positions in the stocks mentioned. The Motley Fool recommends Heico, Hexcel, Lockheed Martin, RTX and TransDigm Group. The Motley Fool has a disclosure policy.

Here’s what General Electric’s aerospace business is worth, originally published by The Motley Fool

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