General Electric's aerospace business is worth

in stock general electric (G.E. 1.28%) The company's stock price has soared 85% over the past year, a sign of growing investor confidence in the company's impending restructuring. Remaining entity GE Aerospace has huge potential as GE Vernova (power, renewable energy and electrification business) prepares for his April 2 market debut .

Despite the stock's impressive performance, does it still offer a value proposition? Let's take a closer look.

Dissolution of General Electric Company

As we previously highlighted in our comprehensive analysis, GE Vernova's market capitalization is conservatively estimated to be around $27.3 billion. However, GE stock is currently worth about $183 billion. Despite the fact that his $27.3 billion estimate for GE Bellnova is conservative (meaning it's a good investment at that level), his implied $155.7 billion is reasonable for GE Aerospace. Is it a good evaluation?

Why General Electric's stock price has skyrocketed

There's little doubt that the market reassessed the GE Aerospace portion of the company last year. I think there are several reasons for this.

• GE Aerospace is outperforming other large commercial aerospace companies. RTX and boeing.
• The company is also less exposed to some of the margin and supply chain issues in the defense industry that have impacted and continue to impact RTX. lockheed martinand to some extent Boeing too.
• Investors stopped pricing GE as an industrial conglomerate and started thinking of the company as “GE Aerospace + GE Vernova” and valuing it accordingly (aerospace companies command a valuation premium over industrial companies). ).

GE Aerospace's rival engine manufacturer RTX; airbus The A320 neo family suffered disappointing results in 2023 after it was discovered that the powder coating used on the engine's turbine disks could be contaminated. The engine had to be removed and inspected, resulting in a multibillion-dollar hit to revenue and cash flow.

Additionally, RTX's defense business continues to be squeezed by fulfilling fixed-price development programs entered into at a time when inflation was not as strong (Boeing and Lockheed Martin also have this problem).

Meanwhile, Boeing's commercial aerospace business is beset by problems, with question marks over the timing of production increases and, more importantly, what profit margins it will achieve. In contrast, GE Aerospace has fewer stocks, making it a popular stock in the large-cap aerospace sector.

Image source: Getty Images.

GE Aerospace review

As noted above, aerospace companies trade at a valuation premium to industrial companies, reflecting their long-term earnings and cash flow streams from service revenues. For example, aircraft engine models (GE and RTX are both compliant) are supposed to sell engines at a loss, only to generate high-margin parts and service revenue for decades. Masu.

Therefore, as equipment deliveries increase (as is currently the case with the Airbus A320 neo family and Boeing 737 MAX's LEAP engine, the Boeing 787's GEnx engine, and in the future the Boeing 777X's GE9X), the number of engines will increase. Profitability decreases compared to what it would be if it were used annually and the revenue mix shifted to higher margin parts and services.

As a result, no one is evaluating GE Aerospace's current status, but rather what its future earnings and cash flow will be. For example, my estimate of GE Aerospace's implied value of $155.7 billion is worth 31.1 times his management estimate of his 2024 free cash flow (FCF) for GE Aerospace, as shown below. It means that there is.

Data source: GE Aerospace presentation.

This is a very high number for a multi-industry company, but it is on par with valuations for other aerospace-focused companies (see chart below). Additionally, note that GE Aerospace will be under some margin pressure in the coming years as engine deliveries increase and its share of the revenue mix increases. In other words, GE's short-term profits and cash flow don't reflect its long-term potential.

Relationship between HEI price and free cash flow. Data by YCharts.

Is General Electric still worth it?

Based on the numbers above, GE appears to be nearing a perfect valuation. One Wall Street analyst thinks the stock still has room for high-single-digit upside, which looks reasonable, if not exciting.

That said, GE's valuation may have been strengthened by the perception that it is a “go-to” stock in the aerospace and defense sector, given issues with Boeing, RTX, and Lockheed Martin. The situation may change if the three companies start improving their operations.

The best way to consider investment opportunities is to look at the valuations of GE Bellnova and GE Aerospace after their separation. For GE Vernova, anything under $27.3 billion is a great value opportunity, while for GE Aerospace, he has some upside at less than $155.7 billion.