TIP854: GE Aerospace: Chris Hohn’s Biggest Bet w/ Daniel Mahncke & Shawn O'Malley

GE Aerospace is an unusually high-quality business, but the speakers stressed that investors already recognize its strengths and the stock is not clearly on sale. Chris Hohn’s position represents more than 30% of his roughly $50 billion portfolio; one host cited annual returns of about 20% over more than two decades and described Hohn as a concentrated investor who seeks exceptional businesses before their quality is fully priced in. GE shares had recently fallen about 20%, a modest pullback relative to their post-COVID rise. The hosts wanted to understand the company in case a sharper decline created a better entry point.

GE’s aviation business dates to 1917, and its position rests on mission-critical engines, scale and a large installed base. Its history also shows that leadership is not guaranteed: when GE could not meet demand in the 1940s, the government licensed production to General Motors’ Allison division. A pivotal later decision was partnering with Snecma, now Safran, to form CFM International. After five years without orders, the venture was reportedly close to being frozen in 1979 when United Airlines placed an order; Boeing selected the engine exclusively for the 737-300 in 1981. The partnership, extended through 2050, helped make CFM’s engine the best-selling commercial jet engine in history, though timing and luck mattered.

GE’s engine economics depend heavily on aftermarket service. It sells new engines at a loss or near break-even and earns higher margins from maintenance and repairs. GE is estimated to hold about 40% of the global engine maintenance, repair and overhaul market; services provide more than 70% of commercial engine-segment revenue, at a 27% margin. GE estimates that each engine generates about 3.5 times its original sale price in lifetime services, but does not report equipment and service profits separately. Roughly 50,000 GE commercial and 30,000 military engines are in service, typically for 25–30 years with about three major, multimillion-dollar shop visits. Developing a new engine takes roughly a decade and several billion dollars.

The installed base and contracted work provide substantial visibility, but growth is constrained by supply and engine performance. GE’s contracted backlog is about $210 billion, including roughly $170–180 billion in services, or more than four years of revenue; about 85% is the higher-margin portion. Service demand exceeds what GE can deliver, and parts owed to customers rose 20% in the second quarter. The average commercial aircraft is now more than 15 years old, and IATA estimates the industry is short about 5,500 aircraft. The LEAP, used on the 737 MAX and A320neo, reached program break-even in 2024 after nine years of losses, but GE says losses on its newest engine will double this year and peak around 2028. Hotter-running LEAP engines have needed earlier-than-expected overhauls in hot, dusty regions, adding pressure to maintenance economics.

Commercial aviation accounts for roughly three-quarters of GE revenue and almost 90% of profit, making the business both powerful and exposed. About 40% of service revenue comes from rate-per-flight-hour contracts, under which GE bears maintenance costs; higher-than-expected repairs can therefore reduce expected profits. In 2020, aviation revenue fell 33% while profits fell 82%, and revenue did not return to 2019 levels until 2024. New-engine sales also depend on Boeing and Airbus production, while airlines can defer shop visits under pressure. GE’s defense business is more stable through recessions but has roughly 12% margins, about half commercial’s, in part because government cost-plus contracts and data rights limit aftermarket pricing. Government funding covers about half of GE’s research and development, which is roughly 8% of aerospace revenue.

Larry Culp’s turnaround included applying Danaher’s lean manufacturing and continuous-improvement practices, paying down about $80 billion of debt over five years, and splitting GE into GE Healthcare, GE Vernova and GE Aerospace. The three businesses are collectively worth more than $600 billion, versus GE’s roughly $96 billion market value when Culp took over; over eight years, GE’s value rose more than sixfold, or about 26% annually, versus roughly 13% for the S&P 500. The speakers questioned buybacks that used nearly all free cash flow while the stock traded around 40 times free cash flow. They saw a credible strategic rationale for GE’s planned $11.75 billion acquisition of Consolidated Precision Products, a key airfoil supplier, but considered the price—about 26 times expected 2027 EBITDA—high.

The valuation is the central obstacle to investment. One speaker’s model assumes services growth eases from 21% this year to about 9–10% annually through 2030, new-engine growth slows from 20% to around 7%, and revenue reaches about $70 billion by 2030. With commercial margins rising from 26% to 29% and share count declining 1–2% annually, the model implies potential earnings-per-share growth of about 16% annually over four to five years. But at roughly 40 times earnings, returns depend heavily on the exit multiple: a 35–40 times multiple supports a good return, while a fall to 20 times could overwhelm earnings growth. One speaker sees durable earnings and a possible case for a premium multiple, but still keeps GE high on a watchlist rather than in the portfolio, preferring a lower purchase price.