General Electric (GE) is fast approaching the end of the runway as an iconic American conglomerate. A more svelte and focused GE is preparing to take off in a new direction — as GE Aerospace, a pure-play aviation and defense stock.
Investors are so far cheering the change. GE stock hit a new high June 30 and has soared 68% in 2023 so far, after spinning out its GE Healthcare Technologies (GEHC) unit as a separate company late last year. And GEHC stock has climbed 45% since its Jan. 4 debut.
The split-off of GE’s power-generation unit, Vernova, is set for early 2024. It will leave a free-standing GE Aerospace and bring the industrial giant’s long and intricate restructuring to a close.
Once GE was known as the ultimate conglomerate, with its fingers in everything from light bulbs, refrigerators and washing machines to media, entertainment, financial services, energy systems and jet engines. But in the 2000s, the onetime star stock hit several slides, including an 83% slump from 2016 to 2020. It jettisoned businesses.
On Wall Street, at least for now, the GE bears have fled. Investors have hoisted GE stock to its best level in five years.
But with the big GE breakup nearing its home stretch, what should investors expect? Will the run-up of GE stock hold its ground? And can the emergence of GE Aerospace make this American icon relevant again after a decadeslong plunge from grace?
GE Aerospace Joins Blue Chip Stocks
Years of aerospace industry challenges are easing, turning into significant tailwinds for aviation companies. Hurdles remain, however. The soon-to-be GE Aerospace boasts robust growth estimates. And among blue chip stocks, it gives investors a megacap alternative to Boeing (BA) to play defense stocks and the aerospace sector recovery.
GE Aerospace could also fan industry momentum. There has been speculation of a GE merger with the aerospace unit of Honeywell International (HON). That suggests a combination that could challenge the dominance of Raytheon Technologies (RTX), now branded RTX.
Several factors have helped lift shares of General Electric and its aerospace peers. China’s reopening has been disappointing overall but has stirred an uptick in international travel.
And, overall, commercial aviation continues to gain steam after taking a big hit early in the Covid-19 pandemic. Global air traffic rose 21% in 2022 and now stands at roughly 90% of pre-pandemic levels, GE says. That means more need for aircraft repair and services, replacement parts and components.
At the Paris Air Show in June, GE Aerospace revealed an order for more than 100 commercial jet engines from China Airlines and Riyadh Air for their Boeing Dreamliner fleets. Also during the event, both GE and Raytheon signaled improvements in key engine programs and aerospace supply chains.
On the military side, GE Aerospace revealed it may produce engines for fighter jets locally in India for the first time, as that country and the U.S. expand efforts to counter China’s growing diplomatic might.
“The best days are ahead for this aerospace business because of all the longer-term drivers” of growth, said RBC Capital Markets analyst Deane Dray.
Clarifying The GE Aerospace Picture
Underpinning Wall Street’s bullish view on GE stock is General Electric’s massive installed base of aircraft engines. The GE aerospace business boasts 67,000 engines in service across the commercial and defense markets.
But for many years, other businesses clouded the GE aerospace narrative. Cleaving off health care, power generation and other smaller units clarifies the picture. That makes the line of sight into what makes the jet-engine maker successful and “even more attractive,” Dray said.
The analyst has covered GE stock since 2001, or as Dray likes to say, “since the last year of (legendary GE CEO) Jack Welch.” In his view, aerospace was “always the jewel” in a sprawling portfolio of businesses, through all of GE’s ups and downs.
One strength of the GE aerospace unit is that each engine sold produces a steady — and highly profitable — revenue stream for decades to come, due to the need for sophisticated upkeep.
The GE aerospace business generated $26.1 billion in revenue in 2022, up 22% from 2021. A full 70% of that total came from services. The other 30% was equipment sales. Segment profits totaled $4.78 billion, up 66%, led by the parts and services business and offset by rising shipments of newer and therefore less profitable jet engines.
General Electric Separation Of GE Aerospace
General Electric plans early next year to separate aerospace from the sole other remaining business — the energy unit that manufactures gas and wind turbines. Since 2009, GE has sold or spun off other assets, from lighting to locomotives, keeping with the larger global trend to demerge corporate conglomerates.
“The timing has been perfect because investors want this aerospace exposure,” Dray said. They’re buying the stock although it includes the low-growth energy piece for now.
Boeing plans to boost production of its bestselling 737 Max and the 787 Dreamliner by the end of this year, on surging demand from airline customers. GE makes engines for both those jets, and also supplies Airbus (EADSY). The company expects commercial air travel to grow 25% annually through 2025, surpassing pre-pandemic levels next year.
All that points to rising demand for jet engines, as well as components and systems for commercial aircraft. GE also supplies engines and other products for military aircraft, along with a range of services needed to maintain and repair them.
GE Stock Hits Highest Stock Price Since 2018
Shares of GE stock briefly surged in late 2021. That’s when General Electric announced it would spin out its energy and health care units. But at that point, the promise of a stand-alone aerospace and defense stock in 2024 couldn’t sustain the shares. The stock stalled for more than a year.
GE stock swung into a sharp recovery beginning in October. It has since climbed about 127% to 109.85 on June 30, its highest level since early 2018.
The January spinoff of GE HealthCare Technologies boosted hopes of GE shares coming out of deal purgatory.
Another big boost for GE stock came March 9 during an investor event in Cincinnati. Management forecast earnings would more than double in 2023. For aerospace, they guided revenue growth in the mid- to high teens, with margins reaching 20% by 2025 and expanding further in the long term.
“We think we’re going to have a very good year,” GE CEO Larry Culp said.
“Not unmindful of the fact that a lot of people are talking about recession, but we’re talking about a high-growth year at GE, right?” he added.
GE stock jumped 5% March 9. Shares turned actionable for growth investors over the past week, as the stock rebounded from its 10-week moving average. The rebound was weak, but a rise in volume would put GE squarely in the target zone.
Transformation Amid Catastrophe
In the first quarter, the GE aerospace business saw double-digit growth in orders, revenue and profits. Production of the new, fuel-efficient Leap engines leapt 53%. Shop visits climbed 32%. Air India selected 800 Leap engines to power its entire narrow-body fleet, the largest Leap order ever, GE said.
Among blue chip stocks, GE’s 68% rally year to date far outpaces those of other aerospace and defense stocks. Boeing stock is up roughly 11% over the same period, while Raytheon stock is down about 3%.
Shares of GE had cratered in 2017-18 amid an earnings collapse, and analysts declared the industrial bellwether in crisis mode.
Since Culp took over as CEO in 2018, GE has simplified its portfolio, continuing to shed businesses while working to slash the company’s considerable debt. General Electric reported $134.6 billion in total borrowings at the end of 2018. By December 2022, that had been cut to $32.4 billion.
Over this time, its prized aerospace business fought various fires: the Boeing 737 Max groundings, the 787 delivery halts, the sharp downturn in commercial air travel and severe supply disruptions due to the coronavirus outbreak.
General Electric’s transformation under these circumstances struck many as audacious. Especially since it still had earnings to deliver and expectations to meet as a public company.
“It’s like trying to change a car tire while the car is going down the highway at 55 miles an hour,” RBC Capital’s Dray told IBD.
China Flies On GE Aerospace Power
Now GE’s aerospace business is poised for prime time.
On the commercial side, the forthcoming GE Aerospace has seen travelers return to the skies, pushing global airlines to renew and expand their fleets.
On the military side, aerospace is benefiting from rising U.S. and EU defense budgets amid the Russia-Ukraine war and China-Taiwan threat.
Jet engines are extremely complex pieces of engineering. Few companies are better at producing this intricate equipment at scale than GE, said Morningstar analyst Joshua Aguilar.
To put things in context, Aguilar noted that Chinese companies like Comac have built aircraft “but they haven’t been able to successfully build a commercial engine.” A Leap engine powers the new Comac C919, China’s first domestically made passenger plane.
Challenges Faced By GE Aerospace
Yet investors awaiting the arrival of GE Aerospace should expect some turbulence. Top among concerns, GE must meet the approaching deadline to separate its aerospace business from its energy business, GE Vernova.
Analysts see a bit of deal limbo still in GE stock as investors worry about hitches in the early 2024 decoupling, Aguilar says. (General Electric says the separation remains on track.)
Another concern is that industrial supply chains are still recovering from disruptions caused by the Covid-19 pandemic.
Jet-engine makers face persistent shortages of labor, parts and raw materials. In just one example, General Electric sent 12 of its machinists from Vermont to Arizona to help out a supplier.
And while Culp has successfully refocused on aviation, that move is not without risk. The business is highly cyclical. Higher interest rates and an economic slowdown could force airline customers to delay or cancel orders.
One concern, Morningstar analyst Aguilar says, is that the new GE won’t have the medium-cycle businesses it once did “to offset long exposure in aviation.” In addition, the company will still hold some legacy insurance liabilities.
Meanwhile, manufacturing, safety and other issues have delayed jet deliveries to end-users despite strong demand. Those issues have included durability issues with General Electric’s Leap and RTX’s geared-turbofan engines, which power Boeing and Airbus jets.
While the companies signal progress on those issues, analysts are focused on actual deliveries. One analyst dismissed rising jet and jet-engine orders during the recent Paris Air Show as “all but irrelevant” given delays in delivering jets already sold.
More broadly, aviation companies face risk from the spread of disease, as the coronavirus pandemic sharply brought home to investors. They are also vulnerable to geopolitical tensions, including the growing hostility between China and Taiwan. And all commercial U.S. and Western European flights were barred from Russian destinations or airspace shortly after Russia’s attack on Ukraine.
Other Blue Chip Aerospace & Defense Stocks
How does the GE aerospace business stack up against competitors?
GE’s commercial aviation franchise is especially strong, competing in several markets that are virtual duopolies.
It goes up against Pratt & Whitney, a division of Raytheon, in the market for narrow-body jets — the fuel-efficient designs that led the pandemic recovery. The Leap engine, made by a GE joint venture, powers the Boeing 737 Max and Airbus A320/A321neo narrowbodies.
In the widebody market, GE challenges the U.K.’s Rolls-Royce. Its GEnx engine powers the Boeing 787 Dreamliner, and its next-gen GE9X is powering the Boeing 777X.
For investors, the looming GE Aerospace promises focused exposure to the commercial aviation recovery.
“Compared to Boeing and Raytheon, GE Aerospace is arguably the highest-quality asset,” analysts at Melius Research said in an April note.
GE Aerospace gets a higher (71%) share of its sales from the commercial end market than Raytheon (41%) and Boeing (53%), the analysts said, while enjoying the highest profit margins. RTX also has little exposure to the widebody market, which is expected to drive the next phase of commercial recovery.
Jet engines are often sold for a loss. But a company like GE “would make eight times the revenue servicing that jet engine at significantly higher profitability over its 30- or 40-year economic life, tied to takeoffs and landings,” Dray said.
On the defense side as well, GE competes with Raytheon and Rolls-Royce to make engines for military jets.
General Electric also has a smaller avionics business, involving things like control and display units. Rivals include Honeywell and RTX’s Collins Aerospace unit.
Mergers, Other Opportunities For GE Stock
Opportunities for GE Aerospace include a merger with Honeywell’s aerospace business, analysts say.
Honeywell is a leading player in avionics and auxiliary power units. GE focuses mainly on jet engines. Their combined assets would span multiple offerings and “compete really well with the Raytheons of the world,” Aguilar told IBD.
The companies previously tried, and failed, to merge in 2001. Speculation about their merger continues, with antitrust regulators likely to remain a hurdle.
Other opportunities reside in the technologies being developed for next-generation jets.
Those include the CFM RISE, which uses “open fan” architecture (meaning no engine covering) and aims to be 20% more fuel efficient than current-gen Leap engines.
Hybrid-electric powertrains and alternative fuels, like hydrogen, are also in the works.
In the defense market, the battle to build the next-gen engines for F-35 jets could be a huge opportunity. The F-35 is called the most expensive U.S. weapons systems program ever. It is expected to cost nearly $1.7 trillion over its lifetime, so the stakes are high.
The U.S. Air Force is exploring options. GE Aerospace has put forth its XA100 technology. Pratt, the incumbent engine supplier, is pushing for an upgrade program to the existing engines, while also offering a new power plant design.
The XA100 could make it on the next, sixth-gen F-35s, some analysts say. Its “adaptive cycle” engine allows stealth fighters to switch between high thrust mode for maximum performance and high efficiency mode for maximum range, GE says.
Aguilar called the XA100 a “phenomenal” piece of technology.
Last summer, GE Aviation changed its name to GE Aerospace, a move designed to highlight its role beyond commercial engines. It may also hint at ambitions up in space, the Morningstar analyst said.
GE Vernova: A Tougher Spinoff
In the countdown to GE Aerospace, a big watch item is the energy business.
General Electric boasts an installed base of 61,000 wind and gas turbines. But its energy business must try to get in the black before standing up on its own as GE Vernova. Profitability could affect the spinout timing.
In Q1, GE’s renewable energy unit lost $414 million on revenue of $2.8 billion, down 1%. The gas power unit managed a $75 million profit on revenue of $3.8 billion, up 9%. Margins slightly improved in both segments, though still a double-digit negative in renewables.
Even General Electric CEO Culp expects the looming energy separation to be “a little tougher” vs. the GEHC health-care technologies spinoff in January.
As management tries to put the energy business on the path to profitability, it faces more scrutiny around project selection and profit margins.
“That is going to be the biggest story in GE stock over the next 12 months,” Aguilar said.
On June 23, rival Siemens Energy warned of a “substantial increase in failure rates of wind turbine components” and withdrew 2023 guidance. The read-through for GE Vernova is not yet clear.
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