GE Aerospace reported 24Q2 revenues of $9.1 billion, up 3.9% year-over-year; GAAP EPS from continuing operations was $1.20, compared with 23Q2’s $1.09; and non-GAAP EPS was $1.20 vs $0.74. The mean estimates of analysts were $8.6 billion for revenues and non-GAAP EPS of $0.99.
Revenues in the Commercial Engines & Services (CES) segment increased 6.9% to $6.1 billion. Services revenues jumped 13.9%, due to higher internal shop visit volume and improved pricing. Equipment revenues declined by 11.2%, as engine shipments volume continues to be hampered by supply constraints. LEAP engine unit sales fell 29.1%. CES segment profit rose 20.9% to $1.68 billion, with segment margin increasing 320 bp to 27.4%, driven by improved performance in services, fewer shipments of low margin engines and improving LEAP services profitability. CES’s strong performance has been supported by robust air traffic, with passenger departures up 9% year-to-date.
In Defense & Propulsion Technologies, segment profit surged 71.1% on a 1.1% increase in revenues. Higher prices and services growth were substantially offset by a 60% decline in engine deliveries (from supply chain challenges.) Orders fell 25%. Yet, segment margins expanded 580 bp to 14.3%, due to pricing, services growth and the nonrepeat of last year’s higher program costs, which more than offset the impact of lower new engine deliveries.
Based upon the quarterly results, management reduced its 2024 revenue growth guidance from low double-digits to high single-digits, but raised its adjusted EPS guidance range by $0.15 from $3.80-$4.05 to $3.95-$4.20. It also anticipates free cash flow of $5.3-$5.6 billion, consistent with its previous guidance of greater than $5 billion.
Accordingly, I now anticipate 2024 GAAP diluted EPS of $5.04 and non-GAAP EPS of $4.23, which is above management’s target range. For 2025, my projections show GAAP EPS of $5.38 and non-GAAP EPS of $4.88.
My projections support a price target of $180, which equates to a forward P/E multiple of 33.4 times projected 2025 GAAP EPS and 36.8 times projected 2025 non-GAAP EPS. With the stock’s 0.7% dividend yield, the potential 6-12 month total return is 12.3%. That merits a performance rating of “2” (Outperform).
The key concern here is valuation. While the company’s profitability may still benefit from a ramping up of LEAP engine deliveries, robust service volumes and its lean cost reduction initiatives, the CES business, which accounts for roughly 85% of the company’s profitability, is still subject to cyclical swings in air traffic volumes. GE’s valuation is now well above peer group averages, so it is likely that its forward P/E multiple will decline over time, along with its earnings growth rate, unless it can sustainably raise its revenue growth rate.
This is a summary of my recent report on GE Aerospace (GE). To obtain a copy of the full report, please reach out to me using the contact information provided below.
September 15, 2024 (Report dated September 9, 2024.)
Stephen P. Percoco
Lark Research
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© 2015-2024 by Stephen P. Percoco, Lark Research. All rights reserved.
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