GE Aerospace’s Big Beat Fails To Take Flight

GE Aerospace delivered the kind of second-quarter report that normally sends a stock into a vertical climb. The company reported adjusted revenue of $12.6 billion, up 24% from a year earlier, while adjusted earnings rose 22% to $2.02 per share and free cash flow jumped 43% to $3 billion. It also raised its full-year guidance across the board. Shares closed down about 4.1% Thursday at $345.73 after reaching $369.97, as the market looked past the beat and focused on signs of slower momentum ahead.

Commercial Engines and Services supplied most of the thrust. Segment revenue increased 27% to $9.7 billion, with services revenue up 26%, spare-parts revenue growing more than 25% and equipment revenue climbing 30%. Orders rose 18% to $12.9 billion, while strong maintenance demand and an aging global aircraft fleet continued to feed a commercial-services backlog of approximately $170 billion. Airlines may be cutting some flights as fuel prices rise, but engine maintenance can only be postponed for so long, and GE’s overhaul shops remain heavily oversubscribed.

The operating performance remained strong, although there was some drag in the margins. Commercial Engines and Services operating margin fell 1.6 percentage points to 27.3%, pressured by higher new-engine shipments, investments and inflation, while companywide adjusted operating margin declined 1.3 points to 21.7%. Total order growth also slowed to 17% after surging 87% during the first quarter. That does not suggest demand has disappeared, but the spectacular pace investors had recently become accustomed to was never going to last forever.

GE still gave investors a substantial guidance increase. It now expects high-teens adjusted revenue growth, operating profit of $10.55 billion to $10.75 billion, adjusted earnings of $7.65 to $7.85 per share and free cash flow of $8.9 billion to $9.2 billion. The new outlook moved meaningfully above the company’s previous guidance, but high-teens full-year revenue growth also implies some deceleration after a 27% increase during the first half. Even after Thursday’s decline, the stock trades at roughly 42 times trailing earnings, leaving little room for anything that resembles slower momentum. The quarter confirmed that GE Aerospace’s growth engine is running well. It also showed that a premium valuation can turn even mild deceleration into turbulence.

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