GE Aerospace’s Earnings: A Surprising Market Response

The stock market’s reaction to GE Aerospace’s (NYSE: GE) recent earnings report is raising eyebrows. It’s unusual for a company to see a 9% drop on a day when it raises its full-year guidance for operating profit, earnings per share (EPS), and free cash flow (FCF). Here’s a closer look at the report and what it might mean for investors.

Highlights from GE Aerospace’s Earnings Report

Despite raising guidance, the stock saw heavy selling on the day of the report. Investors are focused on more than just the surface numbers, as two key issues in GE’s operations are causing unease.

Data source: GE Aerospace presentations.

Challenges with LEAP Deliveries

GE Aerospace consists of two segments: Commercial Engines & Services (CES) and Defense & Propulsion Technologies (DPT). The CES segment plays a crucial role, supplying engines for top-selling aircraft like the Boeing 737 MAX and the Airbus A320neo.

Although CES brought in strong operating profit, raising guidance from $6.6 billion to $6.8 billion, there are worries about supply chain disruptions affecting engine deliveries, particularly the CFM International LEAP engine that powers the Boeing 737 MAX.

The table below reflects a notable decrease in projected delivery growth related to ongoing supply challenges. Even though reduced deliveries might not hurt short-term earnings, they could adversely affect future aftermarket revenue on LEAP engines, where CES earns much of its profit.

Data source: GE Aerospace presentations.

Insights on Defense & Propulsion Technologies

The CES segment forecasts an operating profit midpoint of $6.7 billion, while the DPT segment maintains its profit estimate between $1 billion and $1.3 billion, although management now expects to land at the lower end of that range. On the recent earnings call, CFO Rahul Ghai mentioned increased research and development spending for advanced programs, along with “some pressure” on propulsion and additive technologies.

This news may point to broader difficulties in the defense sector, where increasing complexity drives up costs while governments leverage their bargaining power.

Assessing the Market Reaction

The stock’s decline may be exaggerated if investors previously viewed it as a good value. While the news regarding defense technology is disappointing, it is not the primary profit driver for GE. Concerns about LEAP engine deliveries persist, but demand for commercial jets from Boeing and Airbus remains robust, with backlogs continuing to grow. Delays in LEAP engine deliveries have been acknowledged, yet management still anticipates growth in 2025.

Moreover, overshadowed by the negatives, CES saw a remarkable 29% increase in new orders this quarter, marking a 33% rise year-to-date. Overall, GE Aerospace’s orders increased by 26% year-to-date. The sell-off, when considering these factors, appears unwarranted.

Investment Considerations for GE Aerospace

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.