Thematic evaluation
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GE Aerospace (GE)

October 11, 2024

Compared to: RTX Corp. (RTX) | Lockheed Martin Corp. (LMT) | Industrial Select Sector SPDR Fund (XLI)

Our reasoning

GE Aerospace's current valuation appears slightly overvalued based on its above-average P/E and EV/EBITDA multiples, despite strong financial performance and growth prospects. The market seems to be pricing in an optimistic scenario, potentially overlooking risks such as supply chain constraints and cyclical industry trends. However, the company's strong market position, technological innovations, and potential for further growth in sustainable aviation partially justify the premium valuation.

Key takeaways
  • GE Aerospace is a financially strong company with a strong competitive position and deep customer relationships.
  • The company is navigating a challenging macroeconomic environment, including supply chain disruptions, inflationary pressures, and cyclical trends in the aviation industry.
  • GE Aerospace's strong profitability, increasing free cash flow, and focus on cost management are positive signs for its future performance.
  • However, the company's high level of financial leverage, decreasing working capital, and exposure to industry-specific risks are potential red flags that should be monitored.
  • GE Aerospace's strong order growth and positive air traffic trends suggest that the company is well-positioned to capitalize on the growth opportunities in the commercial aviation and defense sectors.
  • The company's strategic initiatives, such as the RISE program and the divestiture of non-core businesses, demonstrate its focus on innovation and streamlining operations to drive long-term growth and value creation.
  • Overall, GE Aerospace appears to be a high-growth, high-risk investment. Investors should carefully consider their risk tolerance and investment horizon before investing in GE.
Overvalued
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Evaluation summary

  1. Company Overview:

    • GE Aerospace is a leading global provider of commercial and military aircraft engines, systems, and services. The company operates through two main segments: Commercial Engines & Services (CES) and Defense & Propulsion Technologies (DPT).
    • GE Aerospace's product portfolio includes jet engines for commercial airframes, business aviation, and aeroderivative applications, as well as aircraft systems for government, military, and commercial airframers.
    • The company's target market includes airframers, airlines, third-party maintenance, repair, and overhaul (MRO) shops, and government defense agencies.
    • GE Aerospace's key competitors include Pratt & Whitney, Rolls-Royce, and Safran.
    • We are using the Industrial Select Sector SPDR Fund (XLI) as a benchmark for GE Aerospace's price performance and Lockheed Martin Corp. (LMT) and RTX Corp. (RTX) as industry peers for comparative analysis.

  2. Financial Performance:

    • GE Aerospace's revenue has been increasing, driven by strong demand in the commercial aviation and defense sectors.
    • The company's operating profit has also been increasing, with margins expanding significantly due to improved services performance, favorable product mix, and pricing actions.
    • GE Aerospace's profitability is strong, with a Return on Average Assets (ROA) and Return on Average Total Equity (ROE) significantly higher than the industry average.
    • However, GE Aerospace's revenue growth has slowed in recent quarters, potentially due to supply chain constraints and inflationary pressures.
    • Compared to its peers, GE Aerospace has shown strong historical performance, particularly over the longer periods of 2 years and 3 years, significantly outperforming both Lockheed Martin Corp. (LMT) and RTX Corp. (RTX). However, GE has underperformed its peers in the shorter periods of 3 months and 6 months.

  3. Operational Efficiency:

    • GE Aerospace has a strong liquidity position, with a current ratio of 1.14, which is slightly below the industry average. However, the company's working capital is decreasing, which could indicate potential challenges in managing short-term obligations.
    • GE Aerospace has a high level of financial leverage, with a Total Debt to Total Equity Ratio of 111.99, which is slightly below the industry average. The company's debt levels are decreasing, which is a positive sign for its long-term solvency.
    • GE Aerospace's Cash Flow / Total Debt is significantly higher than the industry average, indicating that the company is generating a high level of cash flow relative to its debt obligations.
    • The company's free cash flow is increasing, driven by strong profitability and a focus on cost management.
    • GE Aerospace is investing in R&D and expanding its MRO capabilities to improve reliability, durability, and turnaround times for its customers.
    • The company is also focused on streamlining operations and divesting non-core businesses to drive long-term growth and value creation.
    • Compared to its peers, GE Aerospace has generally shown a higher Sharpe Ratio than its peers, indicating better risk-adjusted returns. However, there are periods where LMT and RTX have outperformed GE on a risk-adjusted basis. This suggests that GE's higher returns are not always accompanied by a higher level of risk.

  4. Growth Opportunities:

    • GE Aerospace is focused on delivering industry-leading reliability and durability through its FLIGHT DECK operating model.
    • The company is making significant progress on the RISE program, including wind tunnel testing of the Open Fan design and a new agreement with the U.S. Department of Energy to advance supercomputing capabilities.
    • GE Aerospace is also investing in developing and maturing sustainable aviation technologies, including hybrid-electric and hydrogen-based propulsion systems.
    • The company's strategic initiatives, such as the RISE program and the divestiture of non-core businesses, demonstrate its focus on innovation and streamlining operations to drive long-term growth and value creation.
    • The company's strong order growth and positive air traffic trends suggest that GE Aerospace is well-positioned to capitalize on the growth opportunities in the commercial aviation and defense sectors.

  5. Risks and Threats:

    • GE Aerospace faces significant risks, including supply chain constraints, inflationary pressures, and cyclical trends in the aviation industry.
    • The company is also facing legal and regulatory risks, including ongoing shareholder lawsuits, environmental liabilities, and compliance with evolving industry standards.
    • The company's high level of financial leverage and decreasing working capital are potential red flags that should be monitored.
    • GE Aerospace's exposure to the commercial aviation and defense sectors makes it vulnerable to disruptions in these industries.
    • The company's reliance on a limited number of suppliers for critical materials could impact its ability to meet its revenue and profit targets.

  6. Valuation Analysis:

    • GE Aerospace's valuation metrics, such as P/E and EV/EBITDA, are currently above the industry average.
    • This suggests that the market is pricing in the company's strong growth prospects and profitability.
    • However, the company's high level of risk and potential for future volatility could lead to a downward adjustment in its valuation.
    • Compared to its peers, GE Aerospace has shown strong historical performance, particularly over the longer periods of 2 years and 3 years, significantly outperforming both Lockheed Martin Corp. (LMT) and RTX Corp. (RTX). However, GE has underperformed its peers in the shorter periods of 3 months and 6 months. This suggests that GE's performance may be more cyclical, with periods of strong growth followed by periods of slower growth.

  7. Price Performance:

    • GE Aerospace's stock price has been volatile in recent months, but has generally trended upwards.
    • The company's stock price has outperformed the Industrial Select Sector SPDR Fund (XLI) over all periods analyzed, with particularly strong outperformance in the 1-year, 2-year, and 3-year periods.
    • However, GE Aerospace's stock price has also experienced larger maximum drawdowns than XLI, indicating a higher risk profile.
    • Compared to its peers, GE Aerospace has shown strong historical performance, particularly over the longer periods of 2 years and 3 years, significantly outperforming both Lockheed Martin Corp. (LMT) and RTX Corp. (RTX). However, GE has underperformed its peers in the shorter periods of 3 months and 6 months. This suggests that GE's performance may be more cyclical, with periods of strong growth followed by periods of slower growth.

  8. Future Outlook:

    • GE Aerospace's management is confident in the company's ability to continue growing its revenue and profits in the coming years.
    • The company is focused on expanding its services business, developing sustainable aviation technologies, and streamlining its operations.
    • However, the company's supply chain constraints and other risks could impact its ability to meet its growth targets.
    • Analyst estimates for GE Aerospace's future performance are generally positive, with a consensus expectation for continued growth in revenue and earnings.
    • However, the company's high level of risk and potential for future volatility could lead to a downward adjustment in analyst estimates.

  9. Summary:

    • GE Aerospace is a financially strong company with a strong competitive position and deep customer relationships.
    • The company is navigating a challenging macroeconomic environment, including supply chain disruptions, inflationary pressures, and cyclical trends in the aviation industry.
    • GE Aerospace's strong profitability, increasing free cash flow, and focus on cost management are positive signs for its future performance.
    • However, the company's high level of financial leverage, decreasing working capital, and exposure to industry-specific risks are potential red flags that should be monitored.
    • Overall, GE Aerospace appears to be a high-growth, high-risk investment. Investors should carefully consider their risk tolerance and investment horizon before investing in GE.
Peer fundamentals 
Fundamentals
Insights
  • GE Aerospace is experiencing a period of strong profitability, with increasing margins and a focus on cost management.
  • The company's revenue growth is decreasing, but the trend is positive, suggesting that the company is navigating a challenging macroeconomic environment.
  • The company's ability to control operating expenses is a key driver of its profitability.
  • GE Aerospace has a strong liquidity position, with a current ratio of 1.14, which is slightly below the industry average. However, the company's working capital is decreasing, which could indicate potential challenges in managing short-term obligations.
  • GE Aerospace has a high level of financial leverage, with a Total Debt to Total Equity Ratio of 111.99, which is slightly below the industry average. The company's debt levels are decreasing, which is a positive sign for its long-term solvency.
  • The company's Cash Flow / Total Debt is significantly higher than the industry average, indicating that GE Aerospace is generating a high level of cash flow relative to its debt obligations.
  • The company is facing supply chain constraints, with 80% of material input shortages tied to nine suppliers across 15 supplier sites. This could impact the company's ability to meet its revenue and profit targets.
  • Significant legal and regulatory risks remain, including ongoing shareholder lawsuits, environmental liabilities, and compliance with evolving industry standards.
  • Overall, GE Aerospace is in a strong financial position, with a high level of profitability, a strong liquidity position, and a decreasing debt burden. The company's focus on cost management, operational efficiency, and strategic initiatives is expected to drive continued growth and value creation for shareholders.
Analysis
  • Revenue - GE Aerospace's revenue is decreasing, but the trend is increasing. This suggests that the company is experiencing some short-term challenges in generating revenue, but the trend is positive. - The company's strong performance in the commercial aviation and defense sectors has been driving revenue and profit growth. - The company's focus on cost management and operational efficiency is contributing to the increase in margins.
    • Profitability
      • GE Aerospace is experiencing a period of strong profitability, with increasing margins and a focus on cost management.
      • The company's ability to control operating expenses is a key driver of its profitability.
      • The company's Return on Average Assets and Return on Average Total Equity are significantly higher than the industry average, indicating that GE Aerospace is effectively utilizing its assets to generate profits and generating a high return on its shareholders' investment.
    • Liquidity
      • GE Aerospace has a strong liquidity position, with a current ratio of 1.14, which is slightly below the industry average. However, the company's working capital is decreasing, which could indicate potential challenges in managing short-term obligations.
    • Solvency
      • GE Aerospace has a high level of financial leverage, with a Total Debt to Total Equity Ratio of 111.99, which is slightly below the industry average. The company's debt levels are decreasing, which is a positive sign for its long-term solvency.
    • Operational Efficiency
      • The company's Cash Flow / Total Debt is significantly higher than the industry average, indicating that GE Aerospace is generating a high level of cash flow relative to its debt obligations.
    • Cash Flow Analysis
      • Cash flows from core business operations are increasing, driven by strong profitability and a focus on cost management.
      • Cash flows related to long-term assets are decreasing, indicating a shift towards organic growth and a focus on streamlining operations.
      • Cash flows related to debt and equity are increasing, reflecting the company's efforts to reduce debt and return cash to shareholders.
    • Risk Factors
      • The decreasing trend in working capital and the high level of financial leverage are potential red flags that should be monitored.
      • The company is facing supply chain constraints, with 80% of material input shortages tied to nine suppliers across 15 supplier sites. This could impact the company's ability to meet its revenue and profit targets.
      • Significant legal and regulatory risks remain, including ongoing shareholder lawsuits, environmental liabilities, and compliance with evolving industry standards.
    • Future Outlook
      • The company's revenue growth is expected to continue to increase, driven by strong demand in the commercial aviation and defense sectors.
      • The company's profitability margins are expected to remain strong, as the company continues to focus on cost management and operational efficiency.
      • The company's free cash flow is expected to continue to grow, providing ample capacity for debt repayment, dividend growth, and investment in organic growth opportunities.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-10-10)
Industrial Select Sector SPDR Fund (XLI)
  • Performance Comparison: GE Aerospace (GE) has consistently outperformed the Industrial Select Sector SPDR Fund (XLI) over all periods analyzed, with particularly strong outperformance in the 1-year, 2-year, and 3-year periods. This suggests that GE has been a strong performer in the industrial sector, potentially benefiting from factors such as strong demand for aerospace products and services, a favorable industry outlook, and effective execution of its business strategy.
  • Risk and Return Analysis: While GE Aerospace (GE) has delivered higher annualized returns than the Industrial Select Sector SPDR Fund (XLI) over the past three years, it has also exhibited significantly higher annualized volatility. This suggests that GE's stock price has been more susceptible to fluctuations in market conditions and company-specific factors, potentially leading to larger gains but also larger losses. Additionally, GE has experienced larger maximum drawdowns than XLI, indicating a higher risk profile.
  • Risk-Adjusted Performance: Despite its higher returns, GE Aerospace (GE) has generally offered a lower Sharpe Ratio than the Industrial Select Sector SPDR Fund (XLI) over the past three years. This suggests that XLI has provided a better risk-adjusted return, meaning that investors have received a higher return for the level of risk taken. GE's higher beta further supports this conclusion, indicating that GE's stock price is more sensitive to market movements and therefore carries a higher risk.
  • Overall Assessment: GE Aerospace (GE) has demonstrated strong performance over the past three years, consistently outperforming the broader industrial sector. However, its higher volatility and larger drawdowns suggest a higher risk profile compared to the Industrial Select Sector SPDR Fund (XLI). While GE's higher returns are attractive, investors should carefully consider its risk profile and compare it to their overall investment goals and risk tolerance. XLI, with its lower volatility and better risk-adjusted returns, may be a more suitable option for investors seeking a more conservative approach.
Peers Price History(as of 2024-10-10)
RTX Corp. (RTX)Lockheed Martin Corp. (LMT)
  • Performance Comparison:
    • GE Aerospace (GE) has shown strong historical performance, particularly over the longer periods of 2 years and 3 years, significantly outperforming both Lockheed Martin Corp. (LMT) and RTX Corp. (RTX). However, GE has underperformed its peers in the shorter periods of 3 months and 6 months. This suggests that GE's performance may be more cyclical, with periods of strong growth followed by periods of slower growth.
    • GE's performance has been inconsistent relative to its peers, with periods of significant outperformance followed by periods of underperformance. This suggests that investors should carefully consider the timing of their investments in GE.
  • Risk and Return Analysis:
    • GE Aerospace (GE) has provided higher annualized returns than its peers over the period, with values ranging from 44.22% to 120.41%. However, GE has also shown higher volatility, with values ranging from 19.11% to 46.48%. This suggests that GE's higher returns come with a higher level of risk.
    • GE Aerospace (GE) has shown higher annualized volatility than its peers, with values ranging from 19.11% to 46.48%. This suggests that GE's stock price is more susceptible to fluctuations than its peers.
    • GE Aerospace (GE) has experienced the largest maximum drawdown of 46.55% on 07/14/2022, significantly higher than Lockheed Martin Corp. (LMT) at 19.69% on 10/05/2023 and RTX Corp. (RTX) at 32.84% on 10/05/2023. This indicates that GE's stock price can experience significant declines during periods of market stress.
  • Risk-Adjusted Performance:
    • GE Aerospace (GE) has generally shown a higher Sharpe Ratio than its peers, indicating better risk-adjusted returns. However, there are periods where LMT and RTX have outperformed GE on a risk-adjusted basis. This suggests that GE's higher returns are not always accompanied by a higher level of risk.
    • GE Aerospace (GE) has a higher beta value than its peers, indicating that it is more sensitive to market movements. This suggests that GE's stock price is more likely to move in the same direction as the overall market, but with greater magnitude.
  • Overall Assessment:
    • GE Aerospace (GE) has shown strong historical performance, particularly over the longer periods of 2 years and 3 years, significantly outperforming both Lockheed Martin Corp. (LMT) and RTX Corp. (RTX). However, GE has underperformed its peers in the shorter periods of 3 months and 6 months. This suggests that GE's performance may be more cyclical, with periods of strong growth followed by periods of slower growth.
    • GE Aerospace (GE) has provided higher annualized returns than its peers over the period, but has also shown higher volatility and a larger maximum drawdown. This suggests that GE's higher returns come with a higher level of risk.
    • GE Aerospace (GE) has generally shown a higher Sharpe Ratio than its peers, indicating better risk-adjusted returns. However, there are periods where LMT and RTX have outperformed GE on a risk-adjusted basis. This suggests that GE's higher returns are not always accompanied by a higher level of risk.
    • GE Aerospace (GE) has a higher beta value than its peers, indicating that it is more sensitive to market movements. This suggests that GE's stock price is more likely to move in the same direction as the overall market, but with greater magnitude.
    • Overall, GE Aerospace (GE) appears to be a high-growth, high-risk investment. Investors should carefully consider their risk tolerance and investment horizon before investing in GE.
Peers Fundamentals(as of 2024-06-30)
RTX Corp. (RTX)Lockheed Martin Corp. (LMT)
  1. Market Position and Size:
    • GE Aerospace (GE) is a large and established player in the aerospace industry, with a market capitalization significantly larger than its peers, Lockheed Martin Corp. (LMT) and RTX Corp. (RTX). However, GE's revenue and profitability are lower than its peers, suggesting that its valuation is driven by factors other than just revenue and profitability, such as brand recognition, market share, and growth potential.
  2. Profitability and Efficiency:
    • GE exhibits strong profitability, with higher gross profit margin, EBITDA margin, and net profit margin compared to its peers and the industry average. This indicates GE's efficiency in managing costs and generating profits.
  3. Financial Health and Stability:
    • GE's financial health is a concern. While it boasts high profitability, its lower liquidity, higher debt levels, and slower growth compared to peers raise questions about its financial stability.
  4. Valuation and Market Perception:
    • The market's perception of GE's value is mixed. While GE is valued higher than its peers in some metrics, it is valued lower in others. This suggests that the market is uncertain about GE's future prospects and its ability to maintain its current valuation.
  5. Cash Flow and Capital Management:
    • GE's cash flow generation strength is lower than its peers, considering their market caps. This suggests that GE is less efficient at generating cash flow from its operations and investing in its business than its peers.
  6. Growth and Future Prospect:
    • GE's growth trends are concerning. Its growth rates are consistently lower than the peer group average, and its growth is decelerating in some areas. This suggests that GE's competitive position is weakening, and its future prospects are uncertain.
  7. Potential for Investment:
    • GE is a risky investment. While it has a strong brand recognition, diversified portfolio, and high profitability, its lower growth, lower cash flow generation, and high debt levels raise concerns about its financial stability and future prospects.
  8. Key Risks and Considerations:
    • Investors should be aware of the following risks:
      • GE's lower growth rates compared to its peers.
      • GE's lower cash flow generation compared to its peers.
      • GE's high debt levels.
  9. Overall Assessment:
    • GE Aerospace (GE) is a large and established player in the aerospace industry, but its financial health and growth prospects are a concern. While GE has a strong brand recognition, diversified portfolio, and high profitability, it is struggling to keep up with the industry's growth and maintain its market share. Investors should carefully consider GE's financial health and growth prospects before making an investment decision.