GE Aerospace Reports Robust 1Q24 Results; Raise Target Price

On April 23, 2024, GE Aerospace (NYSE: GE, $161.26, Market Capitalization: $176.5 billion) reported robust 1Q24 results, with a strong beat on EPS versus consensus. It should be noted that as GE Vernova was spun off from GE on April 2, and Vernova remained a part of the consolidated company for 1Q24. The company released consolidated results for General Electric General Electric on 4/23 for 1Q24, while GE Vernova’s results were declared on 4/25. As for GE Aerospace, the company reported strong revenue growth of 15.5% YoY to $8.1 billion in 1Q24, while Profit increased 15.3% YoY to $1.5 billion. Orders of $11.0 billion increased by 34% YoY, with strength in both Commercial Engines & Services and Defense & Propulsion Technologies. GE Aerospace’s adjusted EPS (on a consolidated basis) increased to $0.92 per share in 1Q24, up 46% YoY from $0.63 per share in 1Q23. Due to the upbeat results delivered by the company, the company raised its FY24 outlook, where it expects revenue growth in lower double-digits and expects operating profit in the range of $6.2 and $6.6 billion for the year (earlier $6.0-$6.5 billion). Overall, GE’s results showed a strong operating margin strength in the commercial spares market business, which is likely to persist throughout the year. Following the results, GE stock rose by 8.3% to close at 162.62 on 4/23, indicating a positive reaction from investors.

On April 2, General Electric spun-off GE Vernova, and the remaining company was renamed GE Aerospace. GE Vernova is now a standalone company that includes Renewable Energy and Power.

Valuation and Recommendation

We value GE Aerospace using the 2025e EV/EBITDA methodology. Our intrinsic value of $175.00 (Previously: $142.00) per share for GE Aerospace is based on the 2025e EV/ EBITDA multiple of 21.5x (at a ~9% premium to the multiple of TransDigm Group TransDigm Group and ~16% discount to the multiple of HEICO Corp). Our valuation for GE Aerospace also includes a 6.7% stake in GE Healthcare. We maintain our ‘Hold’ rating on GE Aerospace with an implied upside of 8.5% from the current market price of $161.26 on 4/25. Risks to our target price include slower than expected growth in the Aviation industry, supply chain shortages, decline in quality, and lower-than-expected time on wing improvements on LEAP engines.

GE Aerospace’s profit and revenue gains may persist on strong maintenance and new engine demand, though margins might edge lower as spare demand rises and new engine builds increase. Furthermore, Boeing’s Boeing production problems are expected to lead to a higher mix of spares as they are GE’s largest customer for margin-dilutive new engines. However, supply chain problems continued in the quarter and remained challenging for GE and the industry. GE is the market leader in narrow-body and wide-body engines, with the largest installed base. Reduced durability of new-technology narrow-body engines should keep demand for spares and overhauls on its largest fleet (CFM56) robust as the older fleet is used longer. GE has a strong portfolio in the defense business, powering US destroyers and critical combat helicopters like the Black Hawk and Apache, providing stability to the commercial business.

Outlook

The Company is expected to deliver revenue growth in the lower double digit range in FY24. GE Aerospace raised its earlier operating profit guidance, expecting between $6.2 and $6.6 billion for the year ($6.0-$6.5 billion earlier). Further, Adjusted EPS is forecasted to be between $3.80 and $4.05 for the year, and Free Cash Flow Flow is expected to be more than $5.0 billion (100% Conversion). Commercial Engines & Services continues to expect revenue growth of mid-to-high teens and increasing operating profit to $6.1 to $6.4 billion, up from the original guidance of $6.0 to $6.3 billion. Defense & Propulsion Technologies predicted revenue growth of mid-single-digits to high-single-digits and operating profit of $1.0 to $1.3 billion. Corporate costs are estimated at ~ $1 billion, including $600 million in expenses and $400 million in eliminations.

GE Aerospace hosted its Investor Day, outlining the company’s strategy. Its financial outlook targets $10 billion in operating profit by 2028, and its capital allocation framework authorizes a $15 billion share buy-back program. The company also raised its dividend to $0.28 per share, initiated on April 5, 2024, a 250% increase

Other Updates

• The Company repurchased ~$1.1 million common shares for $0.1 billion in 1Q24 under the company’s previously authorized $3 billion share repurchase program. The investment in GE HealthCare comprises 30.5 million shares (~ 6.7% ownership interest) on March 31, 2024. During 1Q24, the Company received total proceeds of $2.6 billion from the disposition of 31.1 million shares of GE HealthCare.

• The senior note from AerCap, which has adopted the fair value option and matures in the 4Q25, is still outstanding as of March 31, 2024.

• The Company incurred pre-tax separation costs of $0.4 billion in the quarter, primarily related to employees, establishing standalone functions and IT systems, and professional fees.

• Received an order for F414 engines to power additional KF-21 fighter jets for the Korean Air Force, continuing to build the international business, and finalized testing designs with Sikorsky Innovations for a hybrid electric vertical takeoff and landing demonstrator.

• The Company reached an agreement at the Singapore Airshow with Thai Airways for GEnx-1B engines to power its new widebody fleet of 45 Boeing 787 aircraft. It extended Cebu Pacific’s TrueChoice services agreement for its CFM56 engines. Secured a commitment from easyJet for more than 300 LEAP-1A engines and a services agreement from American Airlines American Airlines for 400 LEAP-1B engines.

• The Company announced plans to invest over $650 million in its manufacturing facilities and supply chain, including $550 million in US and international site upgrades and $100 million in the supply chain. Nearly $450 million will go towards new machines, inspection equipment, building upgrades, and new test cells and safety enhancements at 22 GE Aerospace facilities across 14 states. An additional $100 million will go to supplier partners based in the United States. In addition to the investments announced today, GE Aerospace hires over 1,000 employees for open external positions at its U.S. factories.

• GE Aerospace introduced FLIGHT DECK, the company’s lean operating model, accelerating its next stage of lean progress, ensuring focused execution, and bridging strategy to results.

1Q24

GE (consolidated) posted strong revenue growth of 10.8% YoY to $16.0 billion in 1Q24, compared to $14.5 billion in 1Q23, driven by an increase in all segments and Corporate. Adjusted Sales increased to $15.2 billion from $7.4 billion in 1Q23. Operating Profit (GAAP) was down by 71.3% YoY to $1.9 billion. In comparison, the operating margin was down by 3320 bps YoY to 11.6%, primarily due to a decrease in gains on retained and sold ownership interests of $5.3 billion, primarily related to its GEHC equity position and an increase in separation costs of $0.2 billion. On the other hand, operating profit (Non- GAAP) was up by 75.8% YoY to 1.5 billion from $0.9 billion in 1Q23, with the non-GAAP operating margin increasing by 380 bps YoY to 10.2%. Net income (continuing operations) was $1.5 billion, down by 75% YoY, with EPS (continuing operations) of $1.38, down 75.2% YoY. Net earnings (loss) per share was reported to be lower at $1.39 in 1Q24 against $6.71 in 1Q23; the Adjusted Earnings (loss) per share increased to $0.82 in 1Q24 Vs. $0.27 in 1Q23. Adjusted net income was $906 million, up by 206.1%, with adjusted diluted EPS of $0.82 per share (up 203.7%), which excluded the results from run-off Insurance operations, non-operating benefit income, gains (losses) on purchases and sales of business interests, gains (losses) on equity securities, restructuring costs and separation costs.

1Q24

GE Aerospace’s 1Q24 performance reflects a robust start to FY24, with revenues exhibiting a commendable 15.5% YoY growth to $8.1 billion, compared to $7.0 billion in 1Q23. This growth was primarily driven by pricing, spare parts volume, and increased wide-body and defense deliveries. Further, Commercial Engines & Services revenue rose 16.8% YoY to $6.1 billion in 1Q24, followed by a 17.3% YoY rise in Defense and Propulsion Technologies revenues to $2.3 billion. Commercial Engines and Services revenue increased, primarily due to higher prices, increased commercial spare part shipments, higher services work scopes, and a favorable widebody engine mix. These increases were partially offset by an unfavorable change in the estimated profitability of long-term service agreements of $0.2 billion. Defense and Propulsion Technologies revenues increased, primarily due to 45 more Defense engine unit sales than the prior year and growth in classified development programs and services revenue, partially offset by the Defense engine mix. In 1Q24, for Commercial Engines & Services, orders of $8.3 billion increased 34% YoY, primarily from equipment growth, and revenue was up 16% YoY, with equipment growth outpacing services. In Defense & Propulsion Technologies, orders of $3.0 billion were up 34% YoY with a Defense book-to-bill of 1.1x, and revenue increased by 18% YoY, driven by growth in deliveries, pricing and classified programs. The Segment profit (Non-GAAP) was up 15.3% YoY to $1.5 billion, primarily due to benefits from higher prices and increased commercial spare part shipments. These increases in profit were partially offset by an unfavorable change in the estimated profitability of long-term service agreements of $0.2 billion, additional growth investment, and inflation in the supply chain. Segment margin remained flat YoY. Moreover, Adjusted EPS was up by 46% YoY to $0.92 per share in 1Q24, compared to $0.63 per share in 1Q23. From 2Q24, GE Aerospace will present Commercial Engines & Services and Defense & Propulsion Technologies as reportable segments. As GE Vernova was spun-off from the company, we will discuss GE Vernova’s results separately in the next report on 4/29.

Valuation

A] GE Aerospace: Post-spin-off of GE Vernova, GE Aerospace operates as a standalone entity comprising GE’s aviation business. The company has become a more focused, simpler, stronger aviation franchise winning in growing aerospace & defense markets. For FY24, GE Aerospace now expects revenue growth in lower double-digits. It expects operating profit in the range of $6.2 and $6.6 billion for the year ($6.0-$6.5 billion earlier), with adjusted EPS of $3.80 - $4.05 and free cash flow greater than $5 billion. Also, the company provided a long-term outlook, where GE expects a high single-digit CAGR from 2025-2028, ~$10 billion of operating income and 100% cash flow conversion by 2028.

EV/EBITDA Valuation: We value GE Aerospace using the 2025e EV/EBITDA methodology. Our intrinsic value of $175.00 (Previously: $142.00) per share for GE Aerospace is based on the 2025e EV/ EBITDA multiple of 21.5x (at a ~9% premium to the multiple of TransDigm Group and ~16% discount to the multiple of HEICO Corp). The increase in our price factors into the company’s robust 1Q24 performance and the outlook for FY24. Our target price also factors in the 6.7 % stake in GE Healthcare (valued at market cap). We have increased our adjusted EBITDA estimate to $9 billion from $8.7 billion earlier. We have assumed net debt and non-controlling interests of $4.3 billion, to arrive at an Equity value of $192.0 billion.

Company Description

Post spin-off, GE Aerospace (NYSE: GE), earlier known as General Electric Co., is a global leader in aerospace propulsion, services, and systems, with an installed base of approximately 44,000 commercial and 26,000 military aircraft engines. With a global team of 52,000 employees, GE Aerospace is inventing the future of flight, lifting people, and safely bringing them home. The company provides jet engines and turboprops for commercial airframes, maintenance, component repair, overhaul services, replacement parts, additive machines and materials, and engineering services. From 2Q24, GE Aerospace will present Commercial Engines & Services and Defense & Propulsion Technologies as reportable segments. For FY23, GE Aerospace reported revenues of $31.8 billion.