GE Aviation: A Shining Star in Slowing Aerospace Sector?

At the Paris Air Show this week, all eyes in the aviation industry are watching how recent turmoil will impact order performance. The past few years have been stellar for the industry, with growth 40% higher than the market over the last three years. But this positive growth trend may be about to change.

Industry Struggles

There have been many recent indicators that the aviation industry, which is highly cyclical, will hit a downturn soon. In an interview this week, Centre for Asia Pacific Aviation chairman Peter Harbison stated that “We probably did see a peak in aircraft order last year which… seems to precede the year when things turn down.” Meanwhile, demand in global air freight markets fell by 4.7% from this time last year, according to the International Air Transportation Administration. The IATA also cut its expected 2019 airline profits by 6.67% to $20 billion.

Order numbers are in fact slacking at the 2019 Paris Air Show. Wednesday marked only the third day of the four-day event, but orders are on pace to be 375 planes lighter than last year, a 25.6% decrease.

The jetliner industry is essentially a duopoly, with Airbus EADSY and Boeing BA making up 89.6% of jet aircraft deliveries in 2017. As a result, Boeing’s recent struggles have impacted the entire industry. The two tragic crashes of Boeing’s 737 MAX aircraft and the subsequent grounding only caused 49 out of 5,008 orders to be cancelled. Yet recent focus groups indicate that many travelers would not be willing to fly on one of these planes. Meanwhile, the Boeing 777x, which is currently in development, has had its timeline delayed due to engine issues during testing. As a result, Boeing’s earnings estimates for this year and next have recently been revised down.

GE Rising Above

General Electric GE is one company that seems to have been relatively untouched by the industry struggles. GE’s aviation division makes up about 30% of the company, and holds the largest market share in commercial turbofan engines and military aircraft engines. Plus, its sales are not tied specifically to one aircraft manufacturer, which helps create more stability.

However, GE has a rocky past. Its market cap was up over $260 billion twice over the last 15 years, both times falling to around $90 billion soon after. The current market cap is $90.87 billion as of Wednesday, meaning investors may start to bring up its stock price as GE is at the bottom end of its historical market cap.

Over the past year, GE has underperformed its peer group as shown below. However, some of this can be attributed to GE Power (26% of revenues) showing very little profit, and GE Lighting (4%of revenues) slowly becoming obsolete.

 

 

 

GE is currently a Zacks Rank #2 (Buy), based, in large part, on its recent positive earnings estimate revision activity for this year and next. Zacks Estimates also predict a growth rate next year that is 13% higher than the market.

At the Paris Air Show, GE did $24 billion in sales on the first day, with self-projections calling for more than $35 billion total. This would be a record-breaking sales week for GE, and has the possibility to further boost earnings estimates in the coming weeks.

Bottom Line

The aviation industry seems to be at a tipping point and looks like it may take a dive in the coming year, especially when taking its cyclical history into account. But GE has billions in orders with no big issues in sight. GE also puts roughly $1 billion a year into R&D for its commercial engines, so one can reasonably expect the firm to stay at the forefront of aviation engine manufacturing for a long time.

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