A Redburn Atlantic analyst recently initiated coverage of GE Aerospace (NYSE: GE) with a buy recommendation and slapped a $250 price target on the stock.
Undoubtedly, GE Aerospace is a high-quality company led by a first-class management team. Moreover, it has a dominant market position in commercial airplane engines, with a decades-long stream of lucrative income from aftermarket and services revenue from the installed base of engines on the global fleet. The question is whether $250 is a good value for the stock that now trades around $210.
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The bull case for GE Aerospace
GE and its joint ventures are responsible for engines on both workhorses of the global narrowbody market (the sole option on the Boeing 737 MAX and one of two on the Airbus A320 neo family, as well as the legacy versions still in service), and engines on Boeing's widebody 777,777X, and 787 airplanes as well as Airbus' widebody A330.
As engines can be flown for more than 40 years, there's a stream of secure long-term revenue to come that makes investors willing to pay a premium for the stock.
GE EV to EBITDA (Forward) data by YCharts
Is GE Aerospace a good value?
GE Aerospace does not look particularly cheap regarding any of the above valuation metrics. While you could make a case based on the solidity of its long-term income stream, many of the same assumptions made (a buoyant travel market, airlines demanding planes, flight hours growing, etc.) also apply to other companies in the industry.
A rudimentary comparison (enterprise value to earnings before interest, taxes, depreciation, and amortization, or EBITDA) with other companies with heavy commercial aerospace exposure shows that GE is relatively highly valued.
GE EV to EBITDA (Forward) data by YCharts
As such, GE Aerospace is probably a stock to put on a "monitor" list to buy on a significant dip. A price target of $250 implies a valuation of almost 39 times the estimated 2026 earnings, which looks a little rich.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends GE Aerospace, Heico, Hexcel, Howmet Aerospace, and TransDigm Group. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
