$GE Aerospace(GE)$ $ProShares UltraPro QQQ(TQQQ)$  $NASDAQ(.IXIC)$ $DJIA(.DJI)$ 

GE Aerospace is a leading global aerospace and defence company, specialising in the design and manufacture of jet engines and components for commercial and military aircraft. Its key products include the LEAP engine for narrowbody aircraft and the GE90 for widebody models. The company has two key segments: 1) Commercial Engines & Services (CES), and 2) Defence & Propulsion Technologies (DPT). Within both segments, GE derives revenue from original equipment (OE) sales and aftermarket services, which are recurring in nature with strong visibility. Service revenue comprises 70% and 55% of total revenue for the CES and DPT segments respectively but contributes to the vast majority of overall operating profits, as OE sales (especially for newer platforms) generally result in losses, while aftermarket services command strong margins.

Investment Overview

GE Aerospace is a premier player in the global aerospace and defence sector, renowned for its pioneering jet engine technologies and comprehensive service offerings. Through its 50-50 joint venture with Safran, CFM International, and its own operations, GE's engines are essential components on nearly every popular commercial jet. Collectively, these entities command significant market shares—67% of the current fleet and 72% of the order backlog. The CFM56, a traditional workhorse, powers narrowbody aircraft like the B737 and A320 families, while the LEAP engine, a more recent addition, is not only the sole source on the 737 MAX, but the preferred choice for the A320neo with 60% share. For widebody aircraft, GE’s engines power all models except the A350. GE also delivers critical propulsion technologies and solutions for various military fighter jets, transport aircraft, and helicopters. With robust investments in R&D, including the groundbreaking RISE program, GE Aerospace spearheads innovations that further enhance engine efficiency and reliability, ensuring it remains at the forefront of the industry.

Robust aftermarket services demand to underpin fastest earnings growth in the sector. GE is undeniably one of the main beneficiaries of new aircraft delivery delays, as it has the highest share of previous-gen engines that are not only seeing increasing utilisation but extended lives. Work related to these engines are extremely profitable for the company, boasting operating margins up to double that of new-gen engines. Accordingly, we project GE’s adjusted EPS to surge at a 35-40% CAGR over the next two years, driven by strong demand for lucrative mature engine work, and the growth and maturation of new-gen platforms as the global fleet transitions to the LEAP and GE9x. While rising OE volumes and GE9x engines will likely present a margin headwind over the next two years, we expect growth in its installed base (narrowbody: mid-single digit, widebody: low-single digit), better pricing and productivity gains to drive margin expansion over the longer-term.

Significant flexibility given strong balance sheet and healthy free cash flow conversion. GE is targeting USD10.0bn of EBIT by FY28, implying low double digit CAGR between FY23-FY28F. However, we foresee considerable potential for free cash flow generation to handily outpace earnings growth over the medium-term as favourable working capital movements from better inventory management and forward billings are anticipated to drive free cash flow conversion. Coupled with its modest financial leverage, we expect its free cash flows to grow by 15-20% during the same period. Subsequent to the spin-off of its power business, GE expects to have USD25bn of capital available between FY24-26 for deployment, and has guided that the company will use around 25% of this amount for strategic M&A, and return the remainder to shareholders. Overall, we are constructive on the road-map laid out by the company for sustainable free cash flow growth, and expect this to be a key driver for more share price upside over the long-term.

Risks

A downturn in global air traffic due to macroeconomic weakness could negatively impact demand for aftermarket services. Additionally, failing to enhance LEAP OE margins could lead to margin erosion, while supply chain complexities might result in quality lapses or impede turnaround times for aftermarket services and spare part sales.

GE's extremely dominant position as the clear leader in a highly technical segment of the aviation value chain and its early stage in a long-term industry upcycle. Additionally, we believe GE has strong potential to outperform consensus expectations, which could quickly make its valuation multiples appear more reasonable.

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