GE Aerospace Silences the Doubters -- Here's Why the Stock Is a Buy

GE Aerospace (NYSE: GE) covers nearly all the bases. Given its position as the leading airplane engine manufacturer and engine aftermarket service company, it stands to profit whether the market is trending toward original equipment manufacturing (OEM) as Boeing and Airbus produce planes, or whether the aftermarket is trending stronger.

Here's how and why aerospace watchers should favor this stock now.

GE Aerospace engines and profitability

The following nuance may appear a little complicated, but bear with me. It's quite simple if you start from the principle that new airplane engines tend to be sold at a loss. This is the so-called "negative engine margin" discussed in the aerospace industry. As such, when there are fewer expected engine deliveries, it reduces revenue expectations but still contribute positively to profit.

To be clear, GE Aerospace doesn't want to deliver fewer engines. After all, it makes its money from lucrative aftermarket sales garnered from engines coming in for "shop visits" in the decades to come. So, a delay in engine deliveries will also push out the long-term earnings and cash flow from the aftermarket.

Right now, GE's most important engine is the LEAP, which powers the Airbus A320 neo family and the Boeing 737 MAX. CFM International, a joint venture between GE and Safran , manufactures the LEAP. It is replacing the older CFM56 engine used in the legacy Airbus A320 and Boeing 737 aircraft.

Here's a look at how GE's management has lowered full-year LEAP delivery expectations this year. Management has also cut its expectations for commercial engines and services (CES) revenue growth in 2024.

In its other segment -- defense and propulsion technologies (DPT) -- profit expectations have remained untouched in 2024. Overall, company revenue growth is expected to be in the high single digits in 2024 compared to prior guidance for low double-digit growth.

Data source: GE Aerospace presentations.

A net positive for GE Aerospace?

As noted earlier, the company doesn't want to deliver fewer engines, so the reduction in LEAP engines could be taken as a net negative and lead analysts/investors to lower their valuations of the company due to a pushout of future earnings. That said, there are a few reasons why that might not be the best approach right now.

First, with flight departures continuing to grow and new airplane delivery expectations cut at both Boeing and Airbus this year, airlines will utilize their older planes more. In the critical narrowbody market, that means more servicing of legacy Airbus A320 family and Boeing 737 airplanes, which means more lucrative aftermarket revenue for GE on the CFM56 engine.

Back on GE Aerospace's investor day in March, management predicted that CFM56 shop visits would peak in 2025 and then sequentially decline as they are slowly replaced by LEAP engine shop visits.

Image source: Getty Images.

However, the LEAP engine and airplane delivery delays mean that CFO Rahul Ghai now expects peak shop visits to plateau in 2025 and to stay there for "maybe another couple of years and then start declining."

Second, GE Aerospace has excellent momentum in services. Ghai noted that LEAP services are "shaping a little bit better than what we originally thought" in 2024, and LEAP is "tracking better than CFM56 at this stage of the life cycle." In addition, after an 18% year-over-year increase in CES services orders in the first quarter, CES services orders increased by a whopping 36% in the second quarter.

Indeed, the hike in CES's full-year guidance isn't just about lower LEAP shipments helping profitability; GE is seeing greater profitability from its services revenue.

Image source: Getty Images.

A stock to buy?

The second-quarter results should silence the doubters concerned with lower LEAP engine deliveries because GE is doing well with its aftermarket and services. This ability to win either way -- whether the OEM market or the aftermarket is hot --makes GE Aerospace one of the most attractive stocks in its sector.

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 .