General Electric: Aviation, the biggest for long-term investors

Much has been said about General Electric (NYSE: GE) trajectory from an ‘everything’ powerhouse through the sale of its businesses piecemeal, aiming to weaken and eventually split into 3 separate companies: aviation, healthcare and energy.

I discussed these 3 segments last year and why the overall growth and ownership structure will allow investors to enjoy the best of both worlds. However, the GE that will remain GE will focus almost exclusively on aviation, and although health care and energy are fast-growing business segments – aviation, I believe, may be the biggie for long-term investors.

This is due to 2 levels of investment thesis – short-term and long-term, and each represents a solid independent investment opportunity.

Short Term – Airplanes, Airplanes, Airplanes

As we emerge from the COVID-19 pandemic, we are seeing a continued increase in demand for airlines to renew a good portion of their fleet using the cash they have to acquire more fuel efficient aircraft, which in turn others can attract more passengers through cheaper fares and better onboard services.

This is complicated by the continued emergence of low-cost airlines around the world, which are growing at some of the fastest rates we’ve seen airlines grow in decades, such as Spirit Airlines ( SAVE ), Frontier Airlines ( FRNT ), and more. These airlines aren’t necessarily just taking business away from the major airlines, which still rely heavily on business travel, but are attracting individuals who wouldn’t take these flights if the only alternative was a ticket costing 5 times the 10 times more.

That increase in airlines spending to renew or expand their fleets is boosting demand for GE engines, which are in most planes made by Boeing ( BA ) and Airbus ( OTCPK:EADSY ). This is set to boost near-term growth for the company as we emerge from the pandemic and supply chain issues ease and companies such as Boeing and Airbus are able to deliver new planes.

In Between – Supersonic Adventures and 3D Printing

While we are pleased with the increase in demand for the company’s engines, there are several other factors that will aid growth as we wait for long-term factors to materialize.

Use of GE additives 3D printing technologies to more efficiently produce various parts for both aviation and aerospace – a fast-growing market that is already seeing increased demand as more and more companies are looking for more efficient ways to produce parts without the hassle of large manufacturing plants. This will also be a fast growing market in the aerospace industry as the ability to lift a 3D printer into space means it can take 1 trip and print various products in space instead to produce them on earth and then take many trips to get them into space.

Another interesting growth opportunity is the recent conversation about the return of supersonic flight. While the same obstacles remain, such as the inability to fly over land when going supersonic, with technological advances in the area there may come a time in the not-too-distant future when we see the return of short-haul flights from New York. in London and other continents.

Long Term – Space, Space, Space

The most interesting element of the company’s future growth prospects lies in the exploration of outer space. This is because they are already a global leader in all things aero and they have numerous projects that produce efficient aircraft, rockets and various parts for aerospace – from stratospheric flight to space.

As we can see, according to Morgan Stanley, the space exploration industry is projected to reach nearly $1 trillion in revenue by 2040, driven by lower entry and launch costs, as well as a broader set of companies that explore different methods of achieving space flight and exploration.

This means that beyond current expectations for the company, they are set to be a major part of this fast-growing industry for quite some time and have the potential to be a major beneficiary of increased spending as private entities as well as public ones.

Current expectations for high potential performance

Currently, the company is projected to grow both sales and net income at a fairly rapid pace after divesting many of its slower-growing or negative-growing businesses. Here are those numbers:

Sales growth is expected to accelerate as acquisitions and increased demand continue to drive the company’s orders.

	2023	2024	2025	2026
Income	75.2 billion dollars	81.4 billion dollars	86.0 billion dollars	95.5 billion dollars
gROWTH	+1.30%	+8.33%	+5.63%	+11.1%

Click to enlarge

(Source: Seeking Alpha Analyst Forecast Aggregator)

As we can see, the company is set to enjoy an increase in sales as aviation becomes the sole business segment. But the most interesting thing is how the company’s recent efforts to cut costs and increase their gross margins are being projected onto their net income, which has been growing.

	2023	2024	2025	2026
EPS	$2.76	$4.68	$6.14	$8.07
gROWTH	+30.4%	+69.3%	+31.1%	+31.5%

Click to enlarge

(Source: Seeking Alpha Analyst Forecast Aggregator)

Increased margins and lower debt

The company has generally enjoyed better gross profit margins as technological advances have helped save costs in the manufacturing process, as well as natural growth as they no longer report business segments that have a low gross margin.

In addition to increasing overall gross margin, the company has done 2 things to reduce overhead:

Lower SG&A: Selling, general and administrative expenses have been lower as the company unwinds and sells underperforming assets and segments and focuses on more profitable ones. The Aviation segment is set to have lower overall costs as most of the process is automated, unlike the company’s previous business segments which required a lot of human resources.

Lower debt, which the company sold along with their respective business segment, as well as used the cash infusion from asset sales to pay down their debt. After sitting on $245 billion in long-term debt about a decade ago, they are paying down or shedding a large amount of long-term debt, going from about $100 billion in early 2018 to just over $27 billion according to their latest report. . (Source: GE Balance Sheet).

Lower debt not only means that the company’s valuation is helped by depreciation, but also that the company’s interest expense liability is going down, even as interest rates are going up. After paying just $3 billion in interest expenses for 2019, the company is now expected to pay roughly half that at about $1.6 billion, which is cold hard cash it can use for acquisitions to fuel near- and long-term earnings growth. . (Source: GE Income Statement).

These factors are very encouraging and I believe will be the main driver for the company to exceed the aforementioned, current analyst forecasts.

Conclusion of Investments

Investors who are looking for exposure to the aviation market but don’t want to rely on airlines and other companies that have a volatile cost environment with fuel prices and low-cost airlines emerging on the scene can explore an investment in GE as they remain a leader. aircraft engine manufacturers, which they supply to most major airline manufacturers and defense contractors.

But for investors who want exposure to the broader aerospace industry without trying to guess which company will be the first or winner, GE is also a good long-term play, I believe. That’s because they continue to be industry leaders in the production and delivery of rocket vehicles and systems to both private and government entities leading the 2.0 space race.

Overall, with their focus on reducing debt and using acquisitions to drive growth, I am bullish on the company’s medium-term prospects and very bullish on their long-term, 10-15 year prospects.