GE Aerospace (NYSE: GE) stock rose more than 4% by 11 a.m. ET on Wednesday as investors took advantage of the post-earnings dip in the stock on Tuesday and bought in. Here’s why.
The company’s report contained some negatives, such as the expectation reduction for LEAP engines. A GE Aerospace joint venture with Safran manufactures the LEAP, the sole engine option on the Boeing 737 MAX and an option on the Airbus A320 neo family of airplanes.
A combination of supply challenges and delays in airplane deliveries means GE now expects LEAP engine deliveries to decline by 10% in 2024, compared to 2023. For reference, management started the year expecting a 20%- 25% increase in LEAP deliveries.
The pushout in LEAP deliveries isn’t good because it will push out earnings and the cash flow that GE will receive from the aftermarket when the engines need servicing in a few years.
That said, the disappointing news on LEAP deliveries shouldn’t overshadow the good news on orders, which were up 29% in the commercial engine segment and 19% in the defense business in the third quarter. Moreover, the delay in airplane deliveries will likely mean that GE’s older engines are running more, which means more lucrative aftermarket revenue.
Image source: Getty Images.
For example, management said that shop visits (when engines come in for overhaul) on its older CFM56 engine (used on the legacy Airbus A320 family and legacy Boeing 737) would peak in 2025 and stay at that level until 2027 when the previous expectation was for a decline after 2025.
As such, the nearer-term earnings and cash flow from the upgrade to expectations will offset a pushout in earnings and cash flow likely to occur in later years. It’s a major plus the market might have missed in Tuesday’s knee-jerk selling.
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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.
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