After Earnings, Is GE Aerospace Stock a Buy, a Sell, or Fairly Valued?

GE Aerospace released its second-quarter earnings report on July 17. Here’s Morningstar’s take on GE Aerospace’s earnings and stock.

Key Morningstar Metrics for GE Aerospace

• Fair Value Estimate: $266.00
• Morningstar Rating: ★★★
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of GE Aerospace’s Q2 Earnings

GE Aerospace’s second-quarter commercial engines segment revenue grew 30% to $8 billion and earned a 28% operating margin. Defense revenue and margin were flatter, and management raised its full-year and 2028 revenue and profit expectations considerably.

Why it matters: GE’s commercial engine business delivered revenue and profit in the second quarter, exceeding even what we expected for the third quarter. The company appears to have accelerated its recovery from supply chain disruptions, which had slowed its progress in meeting engine demand in 2024.

• We admire GE’s evident commitment to ongoing process improvements, which allow it to increase throughput in its service business and overall productivity while managing a volatile supply chain. These efforts and their result lend credibility to management’s claims that it can maintain and increase operating margins despite inflationary cost pressure.
• Management upped its near and long-term business expectations, including raising its 2028 operating profit forecast from $10 billion to $11.5 billion. We see the target as eminently achievable, based on our detailed forecast of upcoming demand for engine overhauls and continued aircraft utilization.

The bottom line: We have raised our fair value estimate for wide-moat GE Aerospace’s shares to $266 per share from $238, reflecting increased confidence in our forecast for continued service margin expansion. The shares trade within 2% of our fair value estimate. However, we anticipate that the firm will continue to enhance its dividend and share repurchase programs over time.

Fair Value Estimate for GE Aerospace

With its 3-star rating, we believe GE Aerospace’s stock is fairly valued compared with our long-term fair value estimate of $266, representing an enterprise value/2025 EBITDA ratio of nearly 24 times. With GE’s engines powering nearly three-fourths of global commercial flights, the biggest profit driver for the company is simply more airplanes continuing to take off and land.

Given its portfolio of newer engines entering service, we see decades of sales and eventual profitability growth from manufacturing new engines in the medium to long term, while the company’s older workhorse engines should still provide over a decade of healthy profits, primarily from aftermarket engine services. We forecast 14% compound revenue growth from manufacturing over the next decade. In the larger commercial aftermarket business, we see 7.6% compound revenue growth over 10 years, but with improving margins over time. Overall, including the defense and propulsion segments, we forecast a 9% compound annual revenue growth for GE Aerospace through 2034. But that is just the top line.

Read more about GE Aerospace’s fair value estimate.

Economic Moat Rating

GE Aerospace meets our highest standard of a wide-moat business and was the crown jewel of the GE conglomerate. We believe it will out-earn its cost of capital by a comfortable margin for at least the coming 20 years. We assign GE Aerospace a wide economic moat based on switching costs and intangible assets, stemming from its massive installed base of aircraft engines and the complex technical know-how it takes to design, produce, and maintain them.

Read more about GE Aerospace’s economic moat.

Financial Strength

As of year-end 2024, and accounting for the spinoff of GE Vernova, GE Aerospace’s net debt amounted to just $4.6 billion on a $120 billion balance sheet. GE’s gross debt of $19 billion comes in under 2 times EBITDA coverage and lower than many aerospace peers.

We expect GE Aerospace’s EBITDA to grow, and we think the company’s credit ratings are likely to improve over time. Its over $40 billion securities portfolio is spoken for as securing the similarly valued liabilities of the legacy long-term-care insurance portfolio. Only in an improbable scenario would we foresee the insurance book draining GE Aerospace of resources. We expect GE Aerospace will opportunistically wind down or dispose of its real estate and long-term-care insurance portfolios, the last remnants of conglomerate GE still on the books. Until then, a remote financial risk remains, should payouts from long-term-care policies outstrip the reserves GE has put aside to cover them.

The company announced that it plans to return 100% of available free cash flow to shareholders over the next three years through a mix of dividends and share buybacks. We don’t have a problem with the company maintaining current debt balances to do so.

Read more about GE Aerospace’s financial strength.

Risk and Uncertainty

We assign GE Aerospace a Medium Uncertainty Rating. Complex manufacturing is subject to supply chain risk in the form of the materials needed to build or service an engine as well as the people who do the work. Supply chain bottlenecks or disruption of the workforce could mar the company’s revenue and profitability in one or more product lines almost at anytime.

A more pernicious risk to long-term profitability would be posed by a flaw in one of the company’s engine designs or manufacturing quality, as experienced by Pratt & Whitney with a metallurgy flaw in its GTF engine, which resulted in over $3 billion in cash charges. Since a good portion of GE’s engines are serviced on long-term contracts, the company assumes most of the risk of cost overruns from unforeseen repairs. We see very limited risk to GE’s businesses from import or export tariffs due to many offsetting customs provisions in the global aerospace supply chain and the already restricted list of sources defense contractors can use for inputs.

From an environmental, social, and governance standpoint, we think GE faces a few risks that are well-known to investors, including government investigations into its trade practices, shareholder lawsuits, and potential embargoes from defense sales. The most prominent ESG risk relates to carbon emissions from aerospace engines, though we point out that GE is developing a next-generation sustainable engine in its CFM Rise program. If any of these risks were to materialize, they represent financially quantifiable and finite risks that do not undermine the company’s intangible asset or switching cost moat sources, in our view.

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 aftermarket 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 most Boeing 777s, has yet to see most of its shop visits to GE.

GE Bears Say

• GE is “all in” on its experimental open-fan RISE design for the next generation of commercial engines, which aircraft makers might adopt to enter service in the 2040s.
• Burgeoning demand for its engines could place GE Aerospace’s manufacturing and supply chain under disruptive strain, not just frustrating customers but hampering efficiency.
• Engines sold with long-term service contracts effectively transfer risk to the manufacturer for its performance over time, which can result in higher-than-anticipated maintenance costs and mar the profitability of the program.

This article was compiled by Isela Meraz.