Why aerospace might be worth the wait

The last big hurray for General Electric came under Jack Welch, a CEO who was held in high esteem on Wall Street and throughout the business community. But after his departure, the company he built slowly crumbled.

That said, the company that now uses the ticker symbol “GE” is pretty attractive. Here’s what you need to know.

GE Aerospace, over a decade in the making

General Electric was once a massive and sprawling conglomerate. Although the company’s roots were in the industrial sector, when Welch retired in 2001, the company was also in the financial and media sectors. When the Great Recession hit between 2007 and 2009, GE’s diversification into non-industrial businesses quickly turned negative. This was especially true in terms of its financial momentum, given that the recession was felt most strongly in that sector.

The following leaders tried to right the ship. The efforts included cutting dividends, accepting government bailouts and selling assets. But it wasn’t enough, and after the board tried to let a few insiders fix the company, they finally looked outside, handing the reins to Larry Culp.

Culp previously turned around the industrial peer Danaher. The stranger’s grand plan ended up being a corporate breakup. That effort has now been completed, with GE’s remaining operations being spun off into GE Vernova (NYSE: GEV), GE Healthcare Technologies (NASDAQ: GEHC)and GE Aerospace (NYSE: GE). Notably, Culp remained at the helm of GE Aerospace.

GE Aerospace is well positioned

It is often interesting to watch which company a CEO chooses to lead when a split occurs. Usually, but not always, the company the CEO chooses is the one with the best future prospects. In this case, GE had some compelling assets in its portfolio, so it may not be a clear indication of future opportunities. But don’t ignore the fact that Culp chose GE Aerospace.

The company basically serves two broad markets, consumer air carriers and the military and defense sector. They have different dynamics, but both are likely to see material growth going forward.

The most recent quarter was particularly strong, with orders up 18% year-over-year. Revenue rose 4%, with a 560 basis point improvement in profit margin, leading to a 37% advance in operating profit. That said, the increase in orders is perhaps more exciting given that the company is undergoing a highly publicized transformation. This growth shows that customers have not lost faith in GE Aerospace.

Longer term, GE Aerospace’s defense business has a backlog of nearly $17 billion. This is work that should keep the company busy for years. In terms of the company’s commercial activities, long-term air transport growth is likely to support a strong overall performance. The company increases its service and parts revenue streams with each jet engine it sells. In fact, while selling engines is clearly important, the revenue generated after that initial sale may be even more important.

GE Aerospace’s business will rise and fall over time. This is the norm for cyclical industrial businesses. But with geopolitical tensions always looking like an issue, defense spending looks set to remain a robust support. Meanwhile, industry watchers expect steady growth in consumer air travel, with annual passenger growth of nearly 4% through 2043. This will lead to an additional 4 billion passengers, growth that should support the continued strength of GE Aerospace’s consumer aviation division.

Is GE Aerospace Worth Buying Today?

All in all, GE Aerospace looks like a company worthy of keeping the “GE” ticker symbol. But that doesn’t mean it’s worth buying right now. The share price has skyrocketed, doubling in value in the past year. Wall Street is clearly pricing in a lot of good news, noting that the price-to-earnings ratio is 50 times or so, compared to an industry average of about 32 times, using iShares US Aerospace & Defense ETF as a proxy of the industry.

In other words, GE Aerospace seems well-positioned for the future, but you should probably keep it on your wish list for now. The next bear market (or a decline in the industrial sector) will likely prove a better point to add this stock to your portfolio.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Danaher. The Motley Fool recommends GE HealthCare Technologies. The Motley Fool has a disclosure policy.

The new face of GE: Why aerospace might be worth the wait was originally published by The Motley Fool