GE Aerospace Earnings: On Track for Continued Profit Expansion

Key Morningstar Metrics for GE Aerospace

• Fair Value Estimate: $194.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of GE Aerospace’s Earnings

GE Aerospace GE reported third-quarter earnings very close to our expectations for segment revenue and profit performance and slightly raised 2024 guidance for most of its metrics. The only soft spot was lower defense deliveries and margin in the quarter.

Why it matters: The core of GE’s moat is the long-cycle revenue and profits it derives from maintaining the many thousands of its engines in operation. Specifically, we see the company increasing its profit margins over time as service volumes increase.

• While GE can readily pass on the cost of its parts to commercial customers, contracts with the military may mute this effect such that commercial unit declines were more than offset by price in the quarter, but not in the defense systems business.

The bottom line: We raised our fair value estimate to $194 per share from $192 primarily for the time value of money and an in-line quarter. The soft spot in defense was more than made up for by commercial performance in our forecast.

Between the lines: CFO Rahul Ghai reiterated that GE expects the cost of engine production to gradually decrease with production volume, validating our model for the company’s financial results.

• Ghai mentioned expectations for the new GE9X engine, which is slated to power Boeing’s delayed 777X wide-body jets. GE plans a 30% reduction in cost to produce the 50th engine compared with the first and another 30% savings by the 250th.
• We impute 10% savings from the manufacturing learning curve for every doubling of volume. That is, there are around three doublings (hence 30% savings) between the fourth engine and the 32nd, and another three to the 256th.

Coming up: While the delivery schedule for GE9X has slipped along with Boeing’s delayed launch, GE has already begun delivering the first engines off the line. We forecast GE crossing the 250th GE9X engine mark by early 2030 in any case, and achieving profitability on the GE9X program soon thereafter.