Bernstein began covering GE Aerospace(NYSE: GE), and its analyst slapped a $201 price target on the stock alongside an outperform rating. For context, the target represents a 20% upside from the stock's current price.
Bernstein's price target
Based on the Wall Street consensus for $4.25 in earnings per share in 2024, hitting the price target would put GE Aerospace on a price-to-earnings multiple of slightly more than 47 times its full-year earnings. That might seem excessive to many investors, but the company deserves a relatively rich earnings multiple for two reasons.
First, it reflects its long-term earnings and cash-flow potential from aftermarket services and parts on its aircraft engines. GE Aerospace's commercial airplane engines can be used for over 40 years, and most installed engines will generate decades of lucrative earnings and cash flow.
Second, its profit margins are under near-term pressure because it continues ramping up production of airplane engines, typically sold at a loss. This means GE Aerospace's profit margins will likely be held back for the next few years and then improve significantly as the revenue mix shifts toward the aftermarket as engines are used.
As the Bernstein analyst notes, GE Aerospace will prosper from aftermarket demand as it has a higher percentage of revenue exposure to it than other aerospace companies.
Valuation matters
To add numbers to the discussion, the company generated $5.6 billion in operating profit in 2023, and its current market cap is $181 billion. Management's standing estimate for operating profit in 2024 is $6.5 billion to $6.8 billion. Meanwhile, the guidance from the investor day in March calls for $7.1 billion to $7.5 billion in 2025, reaching $10 billion in 2028.
Image source: Getty Images.
In other words, profits should grow at a double-digit rate through 2028. That's attractive if you are bullish on the commercial aerospace industry over the long term. Still, the stock might take a while to hit the Bernstein target, given the current valuation, so investors must be patient.
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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.
