GE Aerospace

GE Aerospace's commercial engines segment revenue grew 27% year over year with a 27.3% operating margin in second quarter. Defense revenue grew 16% with a 13.8% margin. Management raised its full-year revenue and profit expectations after weathering recent macroeconomic turbulence and uncertainty.

Why it matters: We maintain our admiration for the global franchise that GE Aerospace has cultivated and for the discipline with which it executes productivity-enhancing projects across the business. Despite uncertain times, GE's moat is proving its worth. The company shipped 134 more commercial engines in the second quarter than last year, including 100 more in the Leap family. New engine deliveries generally provide lower margins than aftermarket sales, but commercial margins remained healthy at above 27%. Notwithstanding a spike in jet fuel prices and geopolitical jitters related to war in and around Iran, high global aircraft utilization and fewer recent retirements of older jets in recent months led the commercial aftermarket business to grow 32% in the first half.

The bottom line: We have raised our fair value estimate for wide-moat GE Aerospace to $347 per share from $307 due to the time value of money and a slightly steeper medium-term aftermarket margin growth trajectory. The shares trade within 10% of our fair value estimate, though we anticipate the firm will continue to enhance its dividend and share-repurchase programs.

Our fair value estimate is $347 per share, representing an enterprise value/2026 estimated EBITDA ratio of 27 times and 44 times our 2026 earnings estimate. With GE’s engines powering nearly three-fourths of global commercial flights, the biggest profit driver for the company is simply more airplanes continuing to take off and land.

Given its portfolio of newer engines entering service, we see decades of sales and eventual profitability growth from manufacturing new engines in the medium to long term, while the company’s older workhorse engines should still provide over a decade of healthy profits, primarily from aftermarket engine services. We forecast 14% compound revenue growth from manufacturing over the next decade. In the larger commercial aftermarket business, we see 9.6% compound revenue growth over 10 years, with improving margins over time. Overall, including the defense and propulsion segments, we forecast a 10% compound annual revenue growth for GE Aerospace through 2035. But that is just the top line.

We appreciate the lean operating methods that CEO Culp and his team have implemented at GE Aerospace. We think these programs, and the rigor with which the team implements them, lend some credibility to the company’s claims that it can achieve ongoing productivity improvements in its manufacturing and service arms. As a result, despite leaner margins from new engines like Leap and GE9X ramping up deliveries from initially unprofitable levels, we forecast a stable operating margin in contracted aftermarket services, and gradually improving profitability in time & materials work as GE benefits from operating leverage and the learning curve in its primary service operations supplying engine parts to the industry. Our aggregate forecast shows commercial aerospace margins approaching 29% in our decade-long forecast period, and defense margins just over 22%. Beyond the medium term, we see potential for further margin expansion, assuming no major disruption to air traffic or the manufacturing supply chain.

The jet engine business is capital-intensive. We forecast ongoing internal investments necessary for the company to pursue promising growth opportunities, including open-fan (CFM Rise) and hybrid electric engines for commercial flight, as well as adaptive engine technology for a next-generation fighter program. Consequently, we expect capital expenditures and research and development spending to total nearly $16 billion over the next 10 years, averaging 3.4% and 6.7% of sales, respectively. Nonetheless, we expect management can readily achieve its goal of 100% free cash flow conversion over the long term, which is reflected in our midcycle projection.

Taken together, our forecasts offer a picture of GE Aerospace generating up to $160 billion of free cash flow over the next decade, most of which the company has pledged to return to investors. Management's stated capital allocation policy will be to return upward of 70% of available cash flow to shareholders, that is, cash flow after research & development and capital expenditures, primarily through stock repurchases and an increasing dividend. Carrying these assumptions forward results in a near-doubling of dividends per share by 2030 from 2025's $1.44 level. Similarly, driven by reduced share count over time, we forecast midteens earnings per share growth after 2030.

We use an 8.7% weighted average cost of capital to discount GE Aerospace’s free cash flows.

GE Aerospace meets our highest standard of a wide-moat business and was the crown jewel of the GE conglomerate. We believe it will outearn its cost of capital by a comfortable margin for at least the coming 20 years. We assign GE Aerospace a Wide Morningstar Economic Moat Rating based on switching costs and intangible assets stemming from its massive installed base of aircraft engines and the complex technical know-how it takes to design, produce, and maintain them.

GE competes in virtual duopolies in both the wide-body (twin-aisle) and narrow-body (single-aisle) jet engine markets against Rolls-Royce and Pratt & Whitney, respectively. Crucial to GE Aerospace’s moat is the fact that turbine engines typically fly for more than 20 years, and the company’s commercial and engine services business (representing about 75% of total revenue) makes 70% of that revenue from servicing its engines. This means that GE Aerospace alone commands approximately 40% of the global engine maintenance, repair, and overhaul market, using Oliver Wyman’s MRO market forecasts.

We see a large-scale, highly engineered version of the razor-and-blade business model in the aircraft engine market. The result is high visibility into decades of revenue and profit streams for the engine manufacturer. Switching costs in jet engines are strongly associated with aftermarket service—the blades in the razor-and-blade model.

Most airplanes are powered by only one type of engine. Those that do offer a choice—such as the popular Airbus A320neo, where airlines can choose between Pratt & Whitney’s GTF engine or the GE/CFM Leap—are effectively locked into the chosen engine once the plane is configured and delivered. Thus, GE’s customer switching costs result from the strong integration of the engines and their associated equipment into customers’ airframes and maintenance choices.

Risk aversion also plays into customers’ reluctance to switch from a proven engine. In the United States, aircraft engine inspections and maintenance regimes are mandated and regulated by the Federal Aviation Administration. Unplanned downtime related to concerns about an engine’s efficacy can wreak havoc for airlines in terms of time and expense. The high cost of failure ultimately increases customer loyalty to proven platforms, making reliability and predictability key drivers of engine purchase decisions.

In the formative years after a new engine launches, GE (and other manufacturers) may offer upfront discounts of up to 70% from their listed purchase prices. But over time, as the performance, maintenance, and operating costs and characteristics of an engine prove out, these discounts tend to subside. Depending on its operating conditions, a typical jet engine will require its first major service overhaul about six to 10 years after entering operation and will undergo at least one more overhaul over its lifetime, in which large portions of its component parts will be replaced or repaired, representing as much as 70% of the lifetime revenue to GE from that engine, in total.

Over the last few decades, a growing proportion of jet engines purchased by and for airlines are also covered by long-term service contracts. These bespoke service contracts usually extend to terms over 10 or more years, covering maintenance for a particular fleet or subfleet of engines. Known variously as rate per flight hour service agreements, or “power by the hour,” under these contracts, original equipment manufacturers like GE receive regular service payments from the operator based on the flight hours of each engine. While the contracts are designed to shift the risk of maintenance overages from the airline onto the OEM, they can smooth returns and boost cash flow for the manufacturer, and they solidify switching costs by locking engine maintenance into a given provider over their term. In exchange for payments over the life of the contract, the OEM assumes some or all of the cost of scheduled maintenance, parts, and labor. Because OEMs like GE, Pratt, and Rolls-Royce assume this maintenance risk, they are motivated to debug their engines, reduce maintenance costs, and increase engines’ active time on wing. We believe that by and large OEMs—especially GE with several families of engines in service and their successors entering service—are well positioned to underwrite and price the risk they take in these contracts, as they collect reams of operating data from the engines, some of it in real time.

We believe intangible assets are particularly critical for engine deliveries—the razors in the razor-and-blade model—with extensively engineered titanium, ceramic, carbon fiber, and other composite material turbine blades attached to equally exquisite “razors” that spin at thousands of revolutions per minute and must regularly and reliably heat up to over 1,000 degrees Fahrenheit. The technical knowledge and tooling needed to design and manufacture a jet engine are GE’s main source of intangible assets. This technical expertise is supported by the firm’s research and development budget, which totaled nearly 8% of aerospace revenue over 2020-24, with approximately half of that funding coming from the US government for future military engines. GE's CF34, CF6, GE90, and CFM56 engines all derived from designs originally made to meet government applications, that is, for military aircraft. Other intangible assets include the firm’s patents, long record of success, and embedded customer relationships with established airlines and aircraft leasing companies, not to mention with Boeing and Airbus.

We think GE Aerospace’s status as the premier aircraft engine manufacturer has become self-reinforcing due to the scale the company achieves through market penetration and its ability to reinvest in R&D. Especially now that it operates independently of the other erstwhile GE conglomerate business units, GE Aerospace can further the performance of its products through ongoing R&D investments. Its operating margins exceed Pratt’s by several percentage points, which demonstrates the scale benefits of having a massive installed base in the aerospace industry.

We take as given the need for successive engine families, sometimes variants within a family, to deliver meaningful performance improvement to the operator to justify that operator's adoption. As an example of the benefits of reinvestment, the CFM Leap engine has 6% better utilization and 15% better fuel burn than its CFM56 predecessor, and boasts an industry-leading 99.97% engine dispatch reliability rate. This equates to only one delay or cancelation every 2,500 departures. Without such dramatic performance improvements in successive generations of engine designs, aircraft manufacturers and their airline customers would be less likely to include them in their product plans.

GE Aerospace’s second reporting business unit, defense and propulsion technologies, includes a mix of businesses that share some of the characteristics of the commercial engines business, but we do not ascribe a wide moat to them. More than half the unit’s revenue comes from providing turbine engines to various military aircraft and some surface naval vessels. These have technical complexity and aftermarket revenue but do not present the volume or scale opportunity that the commercial engine business enjoys. This business also houses GE Aerospace’s version of a “skunkworks,” named after Thomas Edison, which offers a next-generation turboprop engine, additive manufacturing capabilities, and other capabilities generally related to aircraft engine manufacture. Hinging mostly on the defense engines business, we ascribe this business unit, which accounts for 25% of GE Aerospace’s business revenue and one-seventh of profits, a narrow moat.

Bears vastly underestimate the incremental profits GE will make from operating leverage as commercial aerospace fully recovers and its Leap engine aftermarket program enters its profitable phase.

The Leap engine is installed on a growing majority of the popular Airbus A320neo family, compounding GE’s prospects for decades of profitable aftermarket revenue from its large installed fleet of engines.

Even the fleet of older engines like the GE90, which went into service in 1995 and powers most Boeing 777s, has yet to see most of its shop visits to GE.

GE is all in on its experimental open-fan Rise design for the next generation of commercial engines, which aircraft makers might, or might not, adopt to propel new jets in the 2040s.

Burgeoning demand for its engines could place GE Aerospace’s manufacturing and supply chain under further disruptive strain, frustrating customers and hampering efficiency.

Engines sold with long-term service contracts effectively transfer risk to the manufacturer for its performance over time, which can result in higher-than-anticipated maintenance costs and dent the profitability of the program.