GE Aerospace - making plane engines that are the best
Whoosh! You are at an airport boarding your most hated airline - Ryanair, but you pick it because you want to travel cheaply. After boarding, you sit near the window and settle down for the next few hours of the flight. You are flying from Warsaw to Dublin to meet some potential investors in your startup in person, while looking at your last-minute meeting notes, your gaze falls on the engine that is used for bringing the plane upwards. The usability of such an engine is of top priority for the company behind it. You don’t know it yet, but it’s been made one of the most sophisticated companies in the world: GE Aerospace, with 44 thousand engines being used by people around the world, and 900 thousand people in planes, using their devices, unknowingly. You don’t know yet, but the same plane you are on is a provider of cash flow for thacompanyny,, and if you knew that, you would ask: “But is it a good investment?” That’s exactly what I’m trying to answer here.
NOTE: In this article, visuals from my software will be used. If you want to check it out, it’s included as part of your Substack Paid membership, so try it out risk-free here:
GE Aerospace (later called GE in the article - the ticker symbol stayed the same, the company had the same name, but was doing business as GE Aerospace) was just another division in the conglomerate that General Electric once was. Still, in 2024, all of that changed when GE split into three companies: GE Vernova, GE Healthcare and GE Aerospace. The CEO of GE went on to lead GEAerospace, which could have meant he liked the economics and/or the product the best.
Once that happened, the shares of GE Aerospace jumped a lot, mostly because of the great fundamentals the spun-off company showed. Their business model is simple in theory: build a great engine, make a contract that spans multiple years with an established airline/government, and then perform services for up to 20 years into the future. That means that the lifetime value of the customer is tremendous - imagine getting paid a bit every year just to watch an engine, and repair it now and then.
That’s how GE Aerospace operates, and for a better look, you can check out this business model canvas I built, which shows everything out visually:
70% of their revenue comes from service-based revenue - the economics are better than just creating an engine. Why? Because creating an engine is expensive - hardware, shipping, research, labour, accidents, while the servicing is just checking repairs and collecting that cash.
That’s why it’s an interesting pick for an industrial company, because normally companies such as CAT, or Deere were dependent on order backlogs, and while GE has an order backlog which spans over $140B, which can last them for a good few years of operations, it isn’t where the wealth lies. It’s in the management of those engines with the big highlight on the word “Safety”, which GE really likes.
I know some of you might say, but Antoni, CAT or Deere aren’t in the same industry. That’s right, but they are in the same sector: industrials, and many companies don’t have the best economics there, which brings us on to their profit margins:
Tell us, please, which format do you prefer - the video or static image for the analysis?
We can see that their net margin is at 18, which is fine by my standards.
R&D is a key metric to watch in this company. Why? It’s in an industry which is characterised by the constant need for safety and innovation. More safety measures and simpler designs are all there to land people safely.
I won’t include a chart for their R&D here, as there could be some sort of data discrepancies before April 2024, but I will go over their R&D spending from the most trusted source: SEC filings! Who doesn’t like reading them? Me. They are boring. But fear not, for I will only use the one chart we need:
Here we can see the clear trend upwards in their R&D spending, which is ok with me - 17.7% from 2022 to 2023, and 9.0% from 2023 to 2024. We can also read that they are spending their R&D money on their flight deck system, which is a way of working that is focused on efficiency and reducing of waste. I also listened to their investor day presentation, and there they told investors how their approach to work has allowed them to clear out an entire floor in one of their buildings! Clearly, they know how to invest that money in a smart way - to drive investor returns.
Part of their free cash flow has been removed by me due to the fact that this data isn’t really certain to be like that for only this part of the formerly GE. Looking at this chart, we can see a positive trend in their FCF which has resulted in themanagement saying theat they will try to reward shareholders as much as possible using 75% of their cash flow for organic returns, and 25% for theacquisitionss, so strong metrics here - this is, of course after all their R&D spending, so don’t worry about them not being able to innovate.
After this much writing, I noticed a few monopolistic traits:
High barriers to entry - making aeroplane engines is hard. Making safe engines that are compliant with different regulations is even harder. This is a significant barrier for new entrants to overcome - trust in the brand is key. GE has earned their reputation for safety.
Economies of scale - as the largest provider in the field of engines, they are usually the default choice for many companies, and that enables them to get more materials at a lower rate than their smaller competitors.
Focus on one product - the difference between them and other companies like Rolls-Royce is the fact that they only do aeroplane engines, nd nothing more, which means that they have greater chances of succeeding - Rolls-Royce ROyce for example, makes engines, but also power generators a nuclear reactors - a fragmented business.
That’s where my proprietary score, Monopolistic Traits Score, comes in:
We can see that while I identified GE’s monopolistic traits, my scoring algorithm has decided to give them a lower score, with a final score of 4.6 out of 10! WHy?
The score is made up of:
Gross margin - 31.55% - generally stable, but could be higher, as it’s really an average number, and that’s why it deserves a rather average score of 5 out of 10.
ROIC is standing at 14.48%, which generally is a decent amount - aligning with their score of 6 out of 10
R&D - The algorithm is calibrated for more innovation to happen in the company. This is where things went a bit wrong; even though they are growing their R&D, it’s still not in the space I would like to see it in - in the “just right” category. The 3.446% of sales is too little for them, and they could invest more. 1 out of 10 is here then.
FCF margin - percentage of sales as cash that their business generates - 17.441% - deserves a 7 out of 10 score, for it being a decent number.
Revenue growth vs the industry is rather slow: 4.97% below the industry growth average could be better, so that’s why they got a 4 out of 10 score.
Let’s go over the positive business metrics that they have:
We can see here that they have a positive equity in their business, meaning that investors aren’t on the negative side in terms of value per share in assets.
GE isn’t the only competitor in this industry, meaning that the government doesn’t have a reason to impose regulations, so a positive ssigneven though they have some monopolistic traits.
A negative cash position can provide some short-term business difficulties, but generally, this isn’t the only thing to look at, since I have built my own Financial Health Score:
A final 7.4 out of 10 score is really great; it clearly shows that a company in the industry can definitely handle their day-to-day operations:
Their FCF consistency (although we do have to remember it contains data from former GE) shows that they have a stable business model, which is good for cash generation - a 10 out of 10 score deserved.
Debt score: the DE ratio is at 1.03, which isn’t the best practice, as it could be a signal of financial burden for the company, so they deserve a stable score of 5.9 out of 10 for that.
Liquidity -they cannot manage short-term obligations properly.
Asset turnover ratio: 0.354 is a moderate figure for the turnover, as it suggests that every $1 in assets generates 35 cents! For that, they deserve a score of 5.3 out of 10.
FCF Margin - again, really important, not only for the monopolistic score, and 17.41% is strong, that’s why they deserve a score of 7out of 10.
For a different view, you can check out the AI’s view, which is under the score (I didn’t take inspiration from it before writing my part):
In my objective analysis, I try to be as conservative as possible, to ensure I try to take on the least amount of valuation risk.
My current valuation thesis is based on the assumption that they will grow their revenue by15% per year, for 10 years. That isn’t impossible. Double-digit annual revenue growth through 2028 is expected by the management, which has also recently upgraded its CAGR of its services revenue to be around 15%, so really cool!
My fair value for them is $321.99, giving us 17.0% upside.
Of course, I could be wrong, and if they slow down, like let’s say 10% per year, the valuation changes:
So based on your risk appetite, you should tinker with their valuation. I rate it as undervalued, and maybe I’ll switch over to this company over CAT for my selling in October (Remember that I’m turning 18 then, so I will move my funds from my dad’s account).
Laugh at the meme before the conclusion:
GE is a strong company, which has a very favourable economic situation as 70% of all its revenues are made from service revenue, and while it’s in the industrial sector, it enjoys some predictability in revenues. They create some of the most advanced engines in the world. They have contracts with governments. They are picked by the top airlines. They are hard to copy.
For those reasons, I rate them as undervalued and as a buy today.
This isn’t financial advice.
Stay focused on the fundamentals.
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