Boeing's problems are good for GE Aerospace: Analyst explains

GE Aerospace (GE) has reported its first quarterly results since becoming an independent company after its spin-off from General Electric. The aerospace developer raised its 2024 profit forecast, buoyed by strong sales for jet engine parts and services. GE Aerospace shares are boosted in Tuesday's trading session after topping first-quarter earnings and revenue estimates.

Argus Research President John Eade joins the Morning Brief to provide insights into GE Aerospace's performance.

Eade describes the current period as "a good time right now for GE Aerospace" citing multiple tailwinds in the aviation industry — namely Boeing's (BA) production backlog and assembly concerns — coupled with the company's outstanding quarterly report, painting "a great story" for its future. Eade highlights that the separation into an independent entity allowed investors to "capture value" that was previously missing under GE's original broad business model.

Shifting his focus to Lockheed Martin (LMT), Eade mentions that the aerospace manufacturer and defense contractor lacks "commercial exposure" and cannot grow as rapidly as GE Aerospace "despite the good news out of Washington" surrounding potential foreign aid packages to Israel and Ukraine. Eade ultimately recommends Lockheed Martin to investors looking for value.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Angel Smith

Video Transcript

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BRAD SMITH: Let's keep the earnings parade rolling here. GE Aerospace shares moving higher after the company reported its first quarterly report since separating from General Electric Power Business. Now the company raised its full year profit forecast citing strong demand for jet engine parts and services. Earlier this month, GE completed its breakup into three companies focused on aviation, energy, and health care.

But Wall Street analysts have been bullish on the aerospace part of that business. Let's bring in John Eade who is the President of Argus Research for more. Great to see you here this morning and thanks for taking some time. First, I want to get your reaction to GE Aerospace and what the company is citing as demand right now for that aerospace business.

JOHN EADE: So what great timing from CEO Larry Culp to have their very first earnings report and report double digit revenue growth, double digit operating profit growth, beat earnings expectations. It's an awesome story. And the company's really benefiting from some tailwinds in the industry with the passenger recovery, with freight starting to pick up. So it's a good time right now for GE Aerospace and it was a good time for GEE to focus on just that business.

SEANA SMITH: Question for you, when it comes to GE and I bring up the Boeing situation right now, with Boeing having some production difficulties. I think some people initially looked at that-- that that would actually be bad news for GE. But could it actually be a bullish sign here for GE given the fact that these airlines are going to have to spend a bit more on service and these newer parts?

JOHN EADE: Well, so yeah. And you look at the backlog for that kind of signal from GE and I do believe their service backlog was up something like 20% year over year. And you look at the backlog for Boeing and their backlog grew 10% year over year through the latest quarter. They're also planning to ramp up production on the 737 in the next couple of years. That's a 30% increase in production there. So yeah, the near term looks pretty good for revenue growth opportunities for a company like GE Aerospace.

BRAD SMITH: How should investors evaluate this company now that it has finally kind of been able to separate and look at some of this part of the business extrapolated from the rest of the business which investors were waiting for it to be split off or spun off?

JOHN EADE: Sure. And when you talk about investors waiting, they were waiting to capture value that they felt was there but wasn't present because there was so many problems with the balance sheet and the mix of businesses. So now, a lot of that value has really been recaptured, I would say. GE Aerospace is breaking new highs right now. Its operating margin is in the 20%-plus range. And if you go back a couple years, overall GE's margins were break even at best.

So the turnaround is complete. And I've got to say there's not a lot of value left in GE. But there is a real growth opportunity. And as you know, the market has been paying for growth for really the past 10 years. So I like the growth outlook for GE but I wouldn't call it a value here.

SEANA SMITH: John, let's also talk about Lockheed Martin. You covered that company as well. They were out with results here. Before the bell, they reported nearly 14% jump in first quarter sales. Geopolitical tensions here really prompting a boost that we're seeing in defense spending. When you couple that with even what we just saw from the House this past weekend, passing that aid bill, what exactly is that going to do to Lockheed Martin's business here going forward? How big of a boost?

JOHN EADE: So Lockheed Martin is not going to be growing as fast as General Electric. It really doesn't have that commercial exposure. It's all government spending. And I think probably the most can expect for Lockheed Martin on the top line is probably low single digit growth over these next few quarters despite the good news out of Washington.

Lockheed Martin where it's seeing its most growth is not necessarily in its aeronautics business but in its space business, the satellites and the technology. And it's trying to integrate that technology in defense systems across the board, not just for the US but for international customers as well. So I don't think the growth is going to be as visible at Lockheed Martin as we've seen at General Electric. The margins at Lockheed Martin are 10%, whereas they're 20% in GE. But you do get a better value with the Lockheed Martin share. You get a 2.7% yield and a lower PE ratio. So I think Lockheed is going to be better for a value investor and GE is going to be better for a growth investor.

SEANA SMITH: All right, John Eade, Argus Research President. Thanks so much for hopping on, taking the time to join us here this morning.