GE Aerospace Stock Decline: Is It a Buying Opportunity?

The recent drop in GE Aerospace's stock following its earnings report seems excessive. It's rare for a company to see a decline of 9% on the day it raises its full-year guidance for operating profit, earnings per share (EPS), and free cash flow (FCF). Let’s delve into what happened and how investors might want to approach the stock.

Understanding GE Aerospace's Earnings Report

Upon releasing its latest financial results, GE Aerospace raised several key guidance metrics. Despite these positive adjustments, the market reacted negatively. This suggests that investors may have concerns beyond the reported figures, particularly regarding two main operational challenges facing the company.

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

Source: GE Aerospace presentations.

Concerns About LEAP Deliveries

GE Aerospace is divided into two main segments: Commercial Engines & Services (CES) and Defense & Propulsion Technologies (DPT). CES is the more critical segment, serving the commercial aviation market with engines for popular aircraft like the Boeing 737 MAX and Airbus A320neo.

CES has shown strong performance this year, and the recent guidance update increased its operating profit forecast due to optimistically projected growth. However, investor concerns center around supply chain disruptions affecting the production of CFM International’s LEAP engines, vital for certain aircraft models.

As outlined in the following table, the anticipated growth in LEAP engine deliveries has diminished due to persistent supply chain challenges and the impact of the Boeing strike. Although fewer engine deliveries may not immediately harm earnings (as engines often incur initial losses), they can hinder long-term revenue from aftermarket services, which is a vital revenue source for CES.

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

Source: GE Aerospace presentations.

Defense & Propulsion Technologies Analysis

GE’s CES segment projects an operating profit of $6.7 billion, while the DPT segment aims for between $1 billion to $1.3 billion, although they indicated it would likely perform at the lower end of this range now. CFO Rahul Ghai mentioned this decision reflects rising investments in research and development and some pressures in the propulsion sector.

This news is disappointing and reflects broader trends in the defense industry. As defense technologies evolve and become more intricate, maintaining profitability is increasingly challenging, especially with customers leveraging their bargaining power effectively.

Market Reaction: Rational or Overblown?

The stock's decline may be an overreaction if investors perceived it as a good investment prior to the earnings report. While the defense sector's outlook is troubling, the DPT segment is not the primary source of GE's earnings. Additionally, concerns about LEAP engine deliveries are valid, but there remains strong demand for aircraft from manufacturers like Boeing and Airbus, who have substantial backlogs and are consistently securing new contracts. Management even indicated that they expect LEAP deliveries to pick up by 2025.

Moreover, the challenging news surrounding LEAP deliveries overshadowed a robust 29% increase in CES orders this quarter, contributing to a 33% rise in year-to-date orders. Overall, GE Aerospace's orders are up 26% for the year, paired with strong performance in commercial aerospace services, suggesting the market may be misjudging the stock's potential.

Note: The author has no position in any mentioned stocks.

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