GE Aerospace just hit it out of the park on earnings. Investors should get used to this because the company is set up for knocking home runs — like having an eternally youthful Aaron Judge in the batter’s box — for years and perhaps decades to come.
The numbers are eye-popping. Second-quarter revenue jumped 21% to $11 billion, and profit margins jumped almost 6 percentage points to 21.7%, driven by commercial engine maintenance and repair, the company reported on Thursday. GE raised its guidance for this year and now expects to earn $11.5 billion of operating profit in 2028, up from a forecast of $10 billion it gave last year. That increase was driven by expected revenue growth of more than 10% for the next several years, up from a forecast last year of high-single-digit sales growth.
So what gives with investors, who drove shares down 3% at one point? For one, analysts had been expecting an even larger guidance increase. For another, the stock is expensive after GE shares gained 60% this year before trading on Thursday, which has boosted the price-to-earnings ratio to more than 46 times, compared with the S&P 500 Index’s P/E of 25 times.
Still, it shouldn’t be hard for shareholders to look past these quibbles because GE Aerospace will be a cash-spewing machine for years to come, and Chief Executive Officer Larry Culp has a history of eagerly returning proceeds through buybacks and dividends.
There are no weaknesses in the fundamentals powering profits. Growth in commercial flights is expected to outpace that of the global economy, and defense spending is poised to increase over the next several years because of myriad global threats.
GE has become the supplier of choice for aircraft engines. Three-fourths of commercial flights are now powered by GE engines, with 49,000 in service, and that number is growing. This is important because GE earns much more money from servicing engines than it does from selling them. New engines, such as the LEAP power plant, actually lose money on each delivery during the early stages of their life cycles.
The company has caught a tailwind from airlines that are flying their jets longer because Boeing Co. and Airbus SE haven’t kept up with demand for new aircraft deliveries. These older engines, principally the CFM-56 that powers earlier versions of the Boeing 737, require more service. GE is expanding its maintenance and repair operations both with its own shops and third-party partners and is investing in equipment to make shop work more efficient. This lucrative business only grows as airlines choose GE engines for their new aircraft.
To help nudge customers to pick its engines, GE has succeeded at improving the number of hours engines can fly before requiring maintenance, which addresses a main customer complaint. GE has done this through “durability kits,” including a new composite fan blade, that are installed during shop visits. This is paying off with large engine contracts of late, including a Qatar Airways aircraft order that calls for more than 400 large GE jet engines. These orders are likely to keep coming as countries resort to ordering Boeing planes as a quick lever to placate President Donald Trump’s push to reduce US trade deficits.
GE’s commercial engine backlog now stands at $140 billion, and the company is sold out on engine deliveries until after the end of this decade. Airbus and Boeing are both seeking to increase aircraft production to whittle down their large backlogs, driving GE’s double-digit sales growth. GE finally has its supply chain in good standing after the pandemic and the grounding of some Boeing planes threw aerospace parts makers into chaos. Culp said suppliers are delivering more than 95% of their volume commitments, up twofold from last year.
Adding to the momentum is an increase of defense spending, especially in the US and Europe. GE’s defense unit has 29,000 engines in service, and the company is angling to be the supplier of choice for US and European next-generation fighter planes. This trend of higher defense spending has long legs as nations around the world react to increased tensions.
Investors also shouldn’t overlook the Culp factor and his ability to drive efficiency throughout GE’s operations. Culp, who took over a failing GE in 2018 and pulled off an astounding turnaround and split up of the company, has been touting efficiency gains through his lean operation program he calls Flight Deck. Expect this effort to continue forever, similar to how he drove efficiency gains and profit margins while CEO of Danaher Corp.
Finally, GE, along with partner Safran SA, is investing heavily in new engine technology that uses an open fan-blade design instead of the typical jet engine encased in a metal protective covering called a nacelle. This design promises 20% fuel savings over current engines and would pave the way for both Boeing and Airbus to design new narrow-body aircraft.
“In our view, the open fan is the most promising path to accomplish this step-change in efficiency,” Culp said today during an earnings conference call with analysts.
This new engine program, which GE and Safran call CFM RISE, is a box that can’t be ticked off yet. There are naysayers who don’t think this approach will work. Culp, though, is exuding confidence in the design as more testing is performed. If GE pulls off the development of this open-fan engine and gains 20% on fuel burn, the company’s cash machine will keep spewing proceeds for decades to come. If that’s the case, the 46 times P/E ratio and the sharp stock gain this year won’t seem pricey at all.
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