GE Aerospace Stock Takes a Hit: Is It Time to Invest?

The decline in GE Aerospace's stock following its latest earnings report seems exaggerated.

The stock plummeted 9% after the release, even though management raised its full-year expectations for operating profit, earnings per share (EPS), and free cash flow (FCF). It's a rare occurrence to see such a drop when the reported numbers actually paint a positive picture.

Understanding GE Aerospace's Recent Developments

The earnings report revealed an increased guidance across various financial metrics. Despite this, investors reacted negatively, indicating that their concerns lie beyond the surface-level figures. A closer look suggests that supply chain issues and anticipated delivery shortfalls of the LEAP engine could be weighing on investor sentiment.

Full-Year 2024 Guidance Metrics	July	Current
Adjusted revenue growth	High single digits	High single digits
Operating profit	$6.5 billion to $6.8 billion	$6.7 billion to $6.9 billion
Adjusted EPS	$3.95-$4.20	$4.20-$4.35
Free cash flow	$5.3 billion to $5.6 billion	$5.6 billion to $5.8 billion

Data sourced from GE Aerospace presentations.

LEAP Engine Delivery Challenges

GE Aerospace operates primarily through two segments: Commercial Engines & Services (CES) and Defense & Propulsion Technologies (DPT). CES is far more critical to the company, holding a substantial share in the commercial aviation market with engines for aircraft such as the Boeing 737 MAX and the Airbus A320neo.

This segment has shown robust growth, leading to an increase in operating profit guidance. Yet, supply chain disruptions have raised concerns about the ability to deliver the popular LEAP engine. This is particularly significant as the LEAP engine is essential for various aircraft models.

Delivery growth forecasts for the LEAP engine have been notably reduced, as shown in the table below. While fewer deliveries won't immediately affect near-term profits, they can impact future revenues, especially from aftermarket sales.

GE Aerospace Full-Year Guidance	At January	At April	At July	Current
LEAP deliveries growth	20%-25%	10%-15%	0%-5%	Down 10%

Data sourced from GE Aerospace presentations.

Defense & Propulsion Technologies Outlook

For the DPT segment, management maintains a profit guidance range of $1 billion to $1.3 billion, with expectations leaning toward the lower end in light of increased research and development costs. This indicates broader industry trends where the complexity of defense technologies and strategic bargaining by governments continue to exert downward pressure on profitability.

A Case of Market Overreaction?

The stock's sell-off seems unwarranted when evaluating the fundamentals. Although the news from the DPT sector is discouraging, this segment does not drive the majority of GE's earnings.

Despite concerns regarding LEAP engine deliveries, the demand for aircraft remains robust. Top manufacturers like Boeing and Airbus have substantial backlogs and continue to secure new orders. While delivery schedules are pushed back, they have not been canceled outright. Management has even indicated that they anticipate an upswing in LEAP engine deliveries by 2025.

Additionally, the decrease in LEAP deliveries obscured the impressive 29% rise in CES orders during the quarter, contributing to a 33% increase year-to-date. Overall, GE Aerospace has reported a 26% increase in orders so far this year, and with a strong demand for commercial aerospace services, the recent stock sell-off appears unjustified.

Note: The author has no positions in any of the mentioned stocks.

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