GE Aerospace Stock: Stand-Alone Jet Engine Maker Slightly Undervalued

The firm enters our aerospace and defense coverage with promising growth prospects and industry-leading operating margins.

Nicolas Owens 2 April, 2024 | 12:52PM
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Key Morningstar Metrics for GE Aerospace

  • Fair Value Estimate: US$152.00
  • Morningstar Rating: 3 stars
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Uncertainty Rating: Medium

 

We are reinitiating coverage of GE Aerospace GE as a stand-alone business following the spinoff of General Electric’s power and wind turbine business as GE Vernova. We assign the jet engine maker a wide economic moat based on the technical complexity of its products, the specialized know-how it has to design, build, and service them, engines’ very long product cycles, and some service contracts that create switching costs for customers.

Following a 1-for-4 distribution of GE Vernova shares to all holders of General Electric, we value GE Aerospace stock at US$152 per share. We believe GE Aerospace stock is slightly undervalued at current prices.

Having paid over US$100 billion in debt since 2018 and restructured and pared down its many businesses, the GE of yesteryear is no more. We believe Aerospace was always the crown jewel of its portfolio. As the preeminent global manufacturer of jet engines, the firm enters our aerospace and defense coverage with promising growth prospects and industry-leading operating margins approaching 20%.

Commercial aerospace products in general, and commercial jet engines in particular, face very robust demand. Over the next 20 years, we expect the global commercial fleet to grow by nearly 20,000 aircraft (most of them narrow-bodies powered by the CFM Leap engine), including net growth as more markets connect to the global air travel network, along with demand for replacements of older, less-efficient aircraft. Between deliveries and eventual servicing of the Leap and ongoing profit flows from GE’s fleet of engines powering wide-bodies, we forecast over US$85 billion in free cash flow to GE Aerospace over the coming decade, most of which we anticipate the company will distribute to shareholders.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
General Electric Co148.06 USD-3.19Rating

About Author

Nicolas Owens  is an industrials equity analyst for Morningstar Research Services, LLC, a wholly owned subsidiary of Morningstar, Inc. He covers the aerospace and defense sector, including Boeing, Airbus, and major North American commercial airlines and defense contractors.

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