GE Aerospace’s $150 Billion Backlog Catches Experts’ Attention

Today’s General Electric (GE) isn’t the one you knew from the days of Jack Welch.

In 2023, the company split into three divisions: aerospace, healthcare, and power generation.

We’re focused on the aerospace division…or should we say financial pros are.

After the company’s latest earnings release, shares climbed, as did search volume, according to our TrackStar data.

Demand for new aircraft remains high, with GE’s backlog sitting at over $150 billion.

Yet, the stock is priced at a premium.

So, is this a buy, hold, or a fold?

General Electric’s Business

GE Aerospace soared into independence on April 2, 2024, completing a strategic transformation that began with the spin-off of GE HealthCare in 2023. 

This aerospace division now stands as a global leader in jet engine manufacturing and aviation services.

The company designs, manufactures, and services jet engines for commercial airliners, business jets, and military aircraft. 

Its products power the skies, with approximately 44,000 commercial and 26,000 military aircraft engines in service worldwide. 

GE Aerospace’s reach extends beyond engines to include avionics, digital solutions, and additive manufacturing capabilities.

The company segments its business into the following areas:

• Services (67% of total revenues) – Encompasses maintenance, repair, and overhaul services for commercial and military engines, as well as sale of spare parts.
• Equipment (24% of total revenues) – Includes the design, manufacture, and sale of new jet engines for commercial and military aircraft.
• Insurance (9% of total revenues) – Represents the company’s run-off insurance operations, which are not part of its core aerospace business but remain on its books.

Revenues are also divided along the following lines:

• Commercial Engines & Services (72% of total revenues) – Designs, produces, and maintains engines for commercial aircraft, including the popular CFM56 and LEAP engine families.
• Defense & Propulsion Technologies (28% of total revenues) – Supplies engines and systems for military aircraft and offers advanced propulsion technologies and additive manufacturing solutions.

The company’s second-quarter 2024 results showcased its post-spin-off momentum. 

GE Aerospace reported a 4% year-over-year increase in adjusted revenue to $8.2 billion, while operating profit surged 37% to $1.9 billion. 

These strong results prompted management to raise their full-year profit and free cash flow guidance, demonstrating confidence in the company’s standalone trajectory.

GE Aerospace’s future looks bright, bolstered by a robust $159.8 billion backlog as of June 30, 2024. 

The company continues to innovate, with initiatives like the CFM RISE (Revolutionary Innovation for Sustainable Engines) program aiming to develop more efficient and sustainable propulsion technologies. 

Plus, as air travel demand rebounds and airlines seek newer, more fuel-efficient aircraft, GE Aerospace stands poised to capitalize on these industry trends.

Financials

Source: Stock Analysis

GE Aviation’s numbers start in 2021.

Looking at this data, we see revenue growth climb nicely into 2023 as demand for new aircraft rose.

Gross and operating margins improved, while profit margins declined slightly in the last 12 months. The difference is the $5.8 billion one-time gains from the spinoff in 2023 as a non-cash item.

That’s why free cash flow remained constant.

Total debt is $20.8 billion, down from $38.0 billion in 2021, while total cash is $15.1 billion.

Operating cash flow reached a multi-year high at $6.9 billion over the last 12 months, easily covering the $1.7 billion in CAPEX and $633 million dividend payout.

Valuation

Source: Seeking Alpha

GE trades at a premium on an earnings basis, higher than both Lockheed Martin (LMT) and L3 Harris Technologies (LHX). However, it’s priced in line with Howmet Aerospace (HWM).

On a cash flow basis, GE is priced a bit more reasonably, though more expensive than Lockheed and L3.

Growth

Source: Seeking Alpha

GE’s YOY revenue growth is accurate. However, its trajectory has slowed considerably, which is why forward guidance is negative.

Much of this depends on the timing of deliveries.

Lockheed’s growth metrics are more stable, while Howmet Aerospace has shown considerably higher sales growth over the past few years.

Ultimately, analysts predict a tougher environment for GE in 2024.

Profitability

Source: Seeking Alpha

GE’s margins are a bit better than what’s shown here.

Gross margins over the trailing 12-month period are at 28.1%, while net income margin is 7.5%. Free cash flow margin is also a touch higher at 9.0%.

This puts GE closer to Lockheed. However, it still lags L3 and Howmet.

Our Opinion 6/10

We have a tough time getting behind the premium price on this one.

GE’s aviation business is certainly set up for success.

Yet, better margins are needed for these kinds of multiples to make sense.

And with consumer demand potentially pulling back, we could see the backlog evaporating by next year

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