GE Aerospace Soars Into A Bright Future With Calculated Focus And Financial Innovation

Key Takeaways

• GE Aerospace's evolution into a separate entity is poised to refine its financial health by focusing on aerospace/defense, targeting investments for operational boosts.
  
• Recent financial maneuvers, including a hefty debt reduction and the infusion of lean operational practices, spotlight an enduring commitment to financial discipline and efficiency enhancement.
  
• Supplier issues and material shortages risk hampering delivery objectives, affecting revenue growth and customer satisfaction, amid financial and market share concerns.

Catalysts

General Electric Company, doing business as GE Aerospace, designs and produces commercial and defense aircraft engines, integrated engine components, electric power, and mechanical aircraft systems.

• GE Aerospace's separation into a standalone company with a focused strategy on aerospace and defense allows for targeted investments and operational improvements in this sector. This is expected to enhance financial performance by improving revenue, net margins, and earnings through increased efficiency and market focus.
  
• Significant reduction in debt by over $100 billion since 2018 and implementation of lean operating models (e.g., FLIGHT DECK) to enhance operational execution highlights strong financial discipline and operational efficiency improvements, which could lead to improved net margins and earnings.
  
• The integration of the latest technologies in propulsion and systems, along with a large, growing backlog and a commitment to R&D spending of more than $2 billion, underscores GE Aerospace's potential for future growth driven by innovation, which can impact future revenues and market share positively.
  
• The substantial growth in orders and the ability to increase prices, as demonstrated in the recent quarter, indicate strong demand and pricing power, positively affecting future revenue and operating profit.
  
• The initiation of a quarterly dividend at a significantly increased rate and the announcement of a $15 billion share buyback program reflect confidence in GE Aerospace's financial strength and future cash flows, signaling potential for enhanced shareholder returns and an impact on earnings per share growth.

Assumptions

• Analysts are assuming General Electric's revenue will decrease by -11.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.8% today to 15.9% in 3 years time.
• Analysts expect earnings to reach $7.5 billion (and earnings per share of $7.09) by about September 2027, up from $4.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $6.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.9x on those 2027 earnings, down from 50.5x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 34.4x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.02%, as per the Simply Wall St company report.

Risks

• Continued material availability challenges and supplier-side constraints could significantly hamper the company's ability to meet delivery objectives, directly impacting revenue growth and customer satisfaction.
  
• The downward revision of LEAP delivery projections, from an anticipated 20%-25% growth to now 10%-15%, may lead to reduced production output, affecting both top-line revenue and market share, particularly in the narrow-body aircraft engine market.
  
• The pressure on improving shop turnaround times and optimizing shop visit output, amidst supply chain and internal productivity challenges, risks affecting service revenues and negatively impacting net margins.
  
• The significant investments of more than $650 million in manufacturing and supply chain could strain short-term cash flow and potentially delay return on investment, impacting earnings.
  
• The transitioning of engine sales towards more Time & Material (T&M) contracts, away from Current Service Agreements (CSAs), could introduce variability in service revenue and margins, affecting the stability and predictability of earnings over time.

Valuation

• The analysts have a consensus price target of $197.16 for General Electric based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $47.4 billion, earnings will come to $7.5 billion, and it would be trading on a PE ratio of 33.9x, assuming you use a discount rate of 6.0%.
• Given the current share price of $187.43, the analyst's price target of $197.16 is 4.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.