MTUAF - GE Aerospace: GE Is Dead Long Live GE

2024-04-03 15:09:34 ET

Summary

• With the spin-off of its power divison Vernova, GE has completed its half a decade restructuring program, resulting in a streamlined entity fully focused on the attractive Aerospace market.
• With the largest installed base and at peak profitability, current-gen engines including the best-selling CFM56 provide a highly profitable aftermarket sales stream that can last well into the 2030s.
• With strong earnings visibility from rollout of next-gen and margin expansion as LEAP and GEnx mature, I see a credible runway for GE to deliver MDD EPS growth through 28E.
• Management is highly committed to reward shareholders, I expect a ~0.8% initial dividend yield and total buyback potential worth ~9% of current capitalization through 26E.
• I believe excellent fundamentals support 21% further upside on a 25.0x 26E FCF multiple. Initiate at Overweight with a $164 YE24 price target.

The old behemoth that was General Electric ( GE ) in the 90s and 2000s and that legendary CEO Jack Welch built is no more. Headed by CEO Larry Culp who took over a debt-ridden, bloated and inefficient entity in 2018, GE has completed a series of divestments and spin-offs to restructure itself, emerging as a fully transformed new company. Following the spin-off of GE Healthcare in 2023 and with its power and energy division Vernova having spun-off earlier this week, the new GE (now known as GE Aerospace) will be laser-focused on the Aerospace and Defense markets and sport a lean and efficient operating model, inspired by the Japanese "kaizen" management philosophy.

Driven by enthusiasm about Culp's work and the post-Covid aviation rebound, GE shares have outperformed both the S&P 500 and the broader industrial sector over the past years. I believe this outperformance can continue through an attractive blend of superior fundamentals, an emerging transition towards the LEAP and GEnx engine families and a favorable industry backdrop. I initiate GE shares at Overweight with a YE24 price target of $164, based on a peer-derived 25x multiple on 26E FCF/sh....

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