Is GE Aerospace Stock a Buy After Recent Sell-Off?

The decline in GE Aerospace's stock following its latest earnings report seems excessive. Investors might find this situation puzzling: how can a company’s stock drop by 9% on the day it reports increased guidance for operating profit, earnings per share (EPS), and free cash flow (FCF)? Let's delve into what happened and what it means for potential investors.

Understanding the Latest Developments

In the latest report, GE Aerospace provided enhanced guidance across various metrics. This included an upward revision in adjusted revenue growth and operating profit. However, the market reacted negatively, indicating concern beyond the numbers presented. Upon closer inspection, two main issues within GE’s operations seem to be causing these market jitters.

Highlights from GE Aerospace's New Guidance

Full-Year 2024 Guidance Metrics	Previous Update (July)	Current Update
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

Despite the positive revisions, the stock's price suffered due to worries surrounding ongoing challenges in its operations.

Delivery Challenges with LEAP Engines

GE Aerospace primarily operates in two segments: Commercial Engines & Services (CES) and Defense & Propulsion Technologies (DPT). The CES segment is particularly vital, as it offers engines that lead the commercial aviation industry, powering aircraft such as the Boeing 737 MAX and the Airbus A320neo.

This year, CES has significantly boosted its performance, prompting management to adjust profit expectations upwards. However, there are major concerns about supply chain problems that may hinder the timely delivery of the popular CFM International (a collaboration between GE and Safran) LEAP engines, a favored choice for modern aircraft.

The following table illustrates the sharp decline in expected growth for LEAP deliveries stemming from these supply chain issues, which are exacerbated by a strike involving Boeing. Although a slowdown in engine deliveries doesn't immediately harm earnings, it poses a risk to long-term revenue generated from parts and services related to these engines.

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

Challenges in Defense & Propulsion Technologies

The operating profit forecast for DPT has remained between $1 billion and $1.3 billion throughout the year, though recent updates suggest results may trend toward the lower end of that range. During the earnings call, CFO Rahul Ghai pointed out increased investments in research and development and hinted at some challenges in propulsion and additive technologies.

Assessing Whether the Market Overreacted

The significant stock decline appears overblown, especially if investors previously viewed GE Aerospace as a viable choice. Although the news regarding the defense segment is less than promising, this branch is not the main source of revenue for GE. The delays in LEAP deliveries are concerning, yet demand for commercial airliners remains robust. Both Boeing and Airbus have secured multi-year backlogs and continue to receive new orders.

Even if LEAP engine deliveries are delayed, management has assured shareholders of expected delivery growth starting in 2025. The uplifts in CES orders this quarter, showcasing a remarkable 29% increase, suggest that order activity remains strong. Overall, GE Aerospace’s orders have risen by 26% year-to-date and the positive trend in commercial aerospace services indicates that the recent sell-off may not be justified.

It is essential for potential investors to consider these factors carefully before making any decisions regarding GE Aerospace’s stock.

GE, Aerospace, Investing