The Problem With GE Aerospace Stock

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The LEAP-1A engine, developed by CFM, a Safran/GE Aerospace joint venture. GE gave investors a look under the hood of its commercial engine business when it reported third-quarter numbers on Tuesday. (AFP via Getty Images)

Key Points

GE Aerospace shares have dropped by an average of 5% after each of the past four quarterly reports despite beating Wall Street earnings estimates.
The stock trades at about 33 times earnings expected over the coming 12 months, compared with the S&P 500 trading closer to 19 times.
Investors are concerned about a slowdown in the high-margin aerospace aftermarket parts and service business.

The higher things rise, the farther they have to fall. Just look at GE Aerospace’s price-to-earnings ratio.

GE Aerospace is on an ignominious streak. Shares have dropped after each of the past four quarterly reports —by an average of 5%. Why, is a good question. Each quarter, the company reported better-than-expected results, topping Wall Street’s earnings estimates by an average of 11%. Earnings growth, positive in each quarter, averaged an impressive 25%.

So what gives? The biggest problem is likely valuation. GE Aerospace stock is relatively expensive. Shares trade at about 33 times earnings expected over the coming 12 months, down from about 45 times a year ago. The S&P 500 trades for closer to 19 times.

Compare GE Aerospace with RTX . The latter’s stock has risen after three of the past four quarterly reports, despite slower earnings growth. (RTX earnings growth is still positive, but closer to 20% year over year.) RTX, however, is beating earnings estimates by a wider margin—about 16% over the past four quarters. What’s more, it’s cheaper. RTX stock trades for about 24 times earnings, down from 26 a year ago.

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So all GE Aerospace needs to do is beat by a wider margin—and be a cheaper stock.

That isn’t the entire story. RTX stock rose a meager 0.6% on Tuesday after spending much of the day in the red, despite beating analysts’ estimates by 27%.

There is an aerospace aftermarket problem. Investors remain worried about a slowdown in the high-margin parts and service business. Boeing and Airbus have struggled for years to boost plane production, leaving older planes in the air longer, which has helped aerospace suppliers’ business mix.

(Aerospace companies typically sell original equipment near cost and make most of their money on parts and service.)

The fear is real, but parts and service revenue in 2027 should still grow at a double-digit rate, according to GE Aerospace. “Management indicated that they had factored in some conservatism,” wrote Vertical Research Partners analyst Rob Stallard on Tuesday. “For example, CFM56 retirements are expected to step up from the very low level seen in recent years.”

The CFM56 engine powers Boeing 737 and Airbus A320 jets. Fewer retirements than expected would boost services growth.

“With aftermarket growth slowing, we think investors are questioning whether GE can justify the 40-plus P/E multiple that it enjoyed earlier this year,” added Stallard. He is still positive, though, rating shares Buy. His price target is $385.

The Street echoes his sentiment. Citi analyst John Godyn called recent levels an “attractive entry point” in a Tuesday report. “About 80% of analysts rate shares Buy. The average Buy-rating ratio for S&P 500 stocks typically ranges from 55% to 60%.

The average analyst price target is about $381, down $6 since the third-quarter report.

That values the stock at about 41 times estimated 2027 earnings. Time will tell if that’s the right multiple.

Write to Al Root at allen.root@barrons.com.

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