The reaction to GE Aerospace‘s (NYSE: GE) latest earnings report might make it to an investing trivia game show one day. When did a company last decline 9% on the day of results that included management raising its full-year operating profit, earnings per share (EPS), and free cash flow (FCF) guidance? Here’s what happened and how to think about the stock.
The table below shows how GE raised guidance across the board, yet the market sold off the stock heavily on the release day. The market is worried about something other than the headline numbers, and on closer inspection, it’s clear two issues with GE’s current operations are causing concern.
|
Full-Year 2024 Guidance Metrics |
July |
Current |
|---|---|---|
|
Adjusted revenue growth |
High single digits |
High single digits |
|
Operating profit |
$6.5 billion to $6.8 billion |
$6.7 billion to $6.9 billion |
|
Adjusted EPS |
$3.95-$4.20 |
$4.20-$4.35 |
|
Free cash flow |
$5.3 billion to $5.6 billion |
$5.6 billion to $5.8 billion |
Data source: GE Aerospace presentations.
GE Aerospace operates in two segments: Commercial Engines & Services (CES) and Defense & Propulsion Technologies (DPT). CES is, by some distance, the more important of the two segments. Its engines dominate the commercial aviation market, with positions on both narrowbody workhorses of the skies (the Boeing 737 MAX and the Airbus A320neo) and the widebody Boeing 787, 777X, and Airbus A330.
CES is also the star performer this year, and once again, the reason for the guidance hike is that CES’ operating profit guidance was raised from $6.6 billion to $6.8 billion from $6.3 billion to $6.5 billion previously.
However, investors are concerned that the ongoing supply chain issues negatively impact CES’ ability to deliver airplane engines, notably the CFM International (a joint venture between GE and Safran) LEAP engine (the sole option on the Boeing 737 MAX and one of two on the Airbus A320neo).
The table below shows the significant reduction in delivery growth expectations due to supply chain issues compounded by the Boeing strike. While fewer deliveries aren’t a negative in terms of near-term earnings because engines tend to be loss-making, they will negatively impact the long-term trajectory of long-term aftermarket revenue on the LEAP engines. CES primarily makes its money on commercial engine aftermarket parts and service.
As such, the market is probably concerned that the ongoing LEAP delivery issues could eventually catch up with GE, even if near-term CES profitability is excellent.
