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Is GE Aerospace Stock Going to $190? 1 Wall Street Analyst Thinks So.

Motley Fool - Thu Apr 11, 5:10AM CDT

GE Aerospace(NYSE: GE) recently received another "buy" rating when Goldman Sachs analyst Noah Poponak slapped a $190 price target on the stock. That implies a 21% upside over the next 12 months. His case for the stock emphasizes the long-term earnings and cash flow potential from its commercial aircraft engines, notably the LEAP engine. I tend to agree with the assessment.

How GE Aerospace will grow profits

Commercial airplane engines tend to be sold at a loss only to generate decades of lucrative aftermarket earnings and cash flow as they come in for "shop visits" over time. For example, GE Aerospace estimates that 75% of an engine's lifecycle revenue comes from the three shop visits, typically in the decades after the sale. Each engine is expected to have at least 20 years of service revenue, and engines can run for more than 40 years.

There are two key points to note. First, aggressively ramping engine sales, as GE is doing now, will suppress profit margins initially but lead to increased profit in the future.

Second, when engines transition, GE will still generate significant profit from servicing older engines. Still, there will be a lag before service revenue from the newer engines takes over the growth baton.

What it means to GE Aerospace investors

That's where GE Aerospace is now with the LEAP engine (made by a GE joint venture with Safran called CFM International) used on the Airbus A320 neo family and the Boeing 737 MAX. The previous Airbus A320 and Boeing 737 versions used CFM International's CFM56 engines.

GE expects CFM56 shop visits to peak in 2025, but services revenue from CFM56 will remain strong for many years as 45% of the CFM56 fleet hasn't had its first shop visit yet. Meanwhile, by 2028, LEAP engine services revenue will be comparable to that of the CFM56.

All told, management expects $10 billion in operating profit in 2028 (compared to $5.6 billion in 2023). With still strong CFM56 services profitability and long-term growth in LEAP services, the company has decades of cash flow growth ahead.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.

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