GE Aerospace Downgraded: Upside Potential May Be Limited

GE Aerospace Downgraded: Upside Potential May Be Limited

GE Aerospace (GE), a spin-off from General Electric (GE) earlier this year, has been a strong performer, outpacing both the broader market and the original GE conglomerate. The company has benefited from a surge in air travel and demand for its aircraft engines.

GE Aerospace’s financial performance has been robust. In 2023, the company generated revenue of $31.9 billion, with 70% of its revenue coming from services. The company’s most prolific engine, the LEAP, has a significant market share in narrow-body aircraft. Additionally, GE Aerospace has a strong presence in the defense sector through its Defense & Propulsion Technologies segment.

Management has provided optimistic guidance for future growth. For 2024, GE Aerospace forecasts operating profit between $6 billion and $6.5 billion, increasing to $7.1 billion-$7.5 billion by 2025 and an ambitious target of $10 billion in annual operating profit by 2028.

However, the author believes that GE Aerospace’s valuation is stretched, with the stock trading at a premium compared to its peers. Even under generous valuation scenarios, GE Aerospace appears expensive. The company’s EV/EBITDA multiple is higher than industry heavyweights such as Honeywell International (HON), Northrop Grumman (NOC), and Lockheed Martin (LMT).

While GE Aerospace’s recent financial results for the first quarter of 2024 were strong, with revenue and earnings exceeding analyst expectations, the author cautions that these results may not be entirely sustainable. The company has hinted at using accounting techniques to boost cash flows in the near term, which could potentially overstate its financial performance.

Ultimately, the author believes that GE Aerospace’s upside potential is limited. The company faces stiff competition in the aerospace industry, its valuation is high, and its future growth prospects may be hindered by challenges such as increased working capital requirements. As a result, the author downgrades GE Aerospace stock to a “Hold” rating.