GE Aerospace(NYSE: GE), formerly a part of General Electric, had a blistering hot start to the first half of 2024. The stock price rose 58% in the first six months of 2024, crushing what were solid gains by the S&P 500 (up 15%) and Nasdaq Composite index (up 19%) over the same period.
Investors are apparently optimistic about this aerospace industry leader, judging by its stellar first-half share price performance. A potential downside is that the run-up in GE Aerospace stock has left it trading at a pricey valuation.
Is it still a buy today?
The birth of GE Aerospace
After struggling for years, General Electric's management enacted a drastic transformation in the company's makeup. In November 2021, the sprawling conglomerate, which built everything from light bulbs to jet engines to medical technology, announced it would spin off several of its businesses into two new publicly traded companies.
GE Healthcare(NASDAQ: GEHC) was spun off in early 2023 and took with it GE's health-related business segments. In April 2024, GE's energy businesses were spun off as GE Verona(NYSE: GEV). What was left under the GE stock ticker was renamed GE Aerospace. Now that these businesses have separated from each other, their management teams can better focus on their specific operations. And for investors, these maneuvers allow them to evaluate each business independently.
A dominant player in the aircraft engine market
GE Aerospace designs and manufactures jet and turboprop engines for commercial, military, and business aircraft. CFM International, its 50/50 joint venture with the French aerospace company Safran Aircraft Engine, manufactures the Leading Edge Aviation Propulsion (LEAP) engine, which is used in the Boeing 737 MAX, Airbus A320, and Comac C919.
CFM International is the leading player in the global aircraft engine market, with a 39% share as of 2020. On its own, GE Aerospace had a 16% market share, so combined, it had a hand in 55% of the total market.
Although aerospace stocks tend to command premiums due to their long-term growth prospects, GE Aerospace now trades at more than 32 times its expected one-year forward earnings -- nearly twice the valuations of peers RTX and Lockheed Martin.
GE PE Ratio (Forward 1y) data by YCharts.
Ongoing supply chain issues could weigh on GE Aerospace this year, resulting in fewer deliveries than expected. An analyst at JPMorgan Chase recently lowered second-quarter estimates for the aerospace manufacturer, while a Jefferies analyst covering GE Aerospace anticipates that LEAP engine deliveries will slide by 5% in 2024.
The long-term outlook is bullish
These potential headwinds and the stock's already-high valuation could weigh on its share price performance in the near term. However, investors have a good reason to be bullish on GE Aerospace for the long term.
That's because its real bread-and-butter is its aftermarket business, where it maintains and repairs its engines. Because aircraft engines need regular servicing to ensure safety and optimal performance, GE Aerospace benefits from a steady demand for parts and services over their lifecycle.
Image source: Getty Images.
Another positive long-term trend for GE Aerospace is the growing demand for air travel. Precedence Research projects that the size of the aircraft engine market will grow at a compound annual rate of 7.9% through 2032. Rising passenger traffic will necessitate larger airline fleets, resulting in more demand for engines, parts, and overhauls -- demand that GE Aerospace stands ready to capitalize on.
Is GE Aerospace still a buy today?
GE Aerospace faces potential headwinds from fewer deliveries that could weigh on the business, potentially limiting the stock's near-term upside given its premium valuation.
That said, the company is incredibly well positioned with its dominant position in the aircraft engine market, and it should be an excellent long-term performer. Its aftermarket business should provide steady cash flow -- analysts at UBS are modeling for compound annual growth of 13% over the next five years from GE Aerospace's aftermarket business.
While GE Aerospace stock commands a premium valuation, it remains a solid stock to buy and hold as it reaps the benefits of growing demand for air travel.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase and Jefferies Financial Group. The Motley Fool recommends Lockheed Martin and RTX. The Motley Fool has a disclosure policy.
