Seeking Alpha
Large-cap, event-driven, value
Profile| Send Message|
( followers)  

GE (NYSE:GE) is a premier infrastructure company, which is a leading supplier of industrial goods for the industries such as power and water, energy management, oil and gas, aviation, transportation and healthcare.

GE Aviation is an operating segment of GE. It is a world-leading provider of jet, turboprop and turboshaft engines, components and integrated systems for commercial, military, business and general aviation aircraft.

Discussed below is the near-term and long-term outlook of the segment.

The segment has three main operating units namely Commercial Engine, Commercial Services, and Military Engines and Services. These units contributed over 85% of the segment's revenues and almost entire order backlog.

Source: Annual report 2012.

(click to enlarge)

Commercial Engines:

Commercial Engines unit serves the needs of commercial airlines all around the world. The unit is the leading provider of the commercial engines for the companies like Boeing (NYSE:BA). By the end of FY 2013, the segment's commercial in-service fleet is expected to consist of nearly 33000 commercial engines. The production volume of the commercial engines for the full year (2013) is expected to be about 2600 units.

Future:

The unit is expected to show a decent growth in the production volumes and in-service fleet. The company predicted a CAGR of 4% for both production volume and in-service fleet till FY 2020 (see the chart below).

Source: The company's documents.

(click to enlarge)

CFM is the 50/50 joint company of GE and Snecma (Safran (OTC:SAFRF)); EA is a 50/50 JV between GE and Pratt & Whitney

During the last few years the company has been spending heavily on R&D, which is focused towards the introduction of most advanced, fuel-efficient, and environment friendly commercial engines.

As mentioned in Annual report 2012:

"Over the next few years, we will transform our aviation engine product line with several new models, including the launches of GEnx, the CFM LEAP and the GE9X. Each engine will improve airline fuel efficiency by 15%, while reducing emissions."

Due to its R&D efforts, the company has been introducing the new engines with high fuel efficiency. The unit's future growth will be powered by the increased contribution from the new generation of commercial engines namely GEnx, LEAP, Passport and GE9x (see the chart below).

Source: The company's documents.

(click to enlarge)

It is expected that by the year 2020 these new engines will contribute over 70% of its total production volumes (Commercial and military units) (see the chart below). The success of these engines is evident from the fact that the company won the orders worth billions of dollars in the recently concluded Dubai Air Show particularly for its most advanced GE9x and LEAP engines. However, icing issues related to GEnx showed the risks associated with the introduction of the new products as against the time-tested products.

Source: The company's documents.

Commercial services:

Commercial services unit serves almost all the services related needs of the company's in-service commercial fleet. The growth in the unit's revenues directly correlates with the growth in the in-service fleet.

Source: The company's documents.

(click to enlarge)

Future:

With the growth in the commercial in-service fleet the unit is expected to show decent revenue growth. The unit offers a long-term, recurring, predictable and high margin revenue stream.

Order backlog:

At the end of Q3, FY 2013, the total order backlog of both the units stood at $106 billion including $85 billion for services and $21 billion for equipments.

Military engines and services:

Company's military in-service fleet is the largest among the western OEM manufacturers with about 24900 engines in service (GE + CFM) (see the table below).

Source: The company's documents.

Future:

The large military fleet will make it sure that the company gets stable service revenues from the unit. However, the growth in the military fleet is expected to be low, as the company predicted a CAGR of 2.55% for the military fleet till FY 2020 (see the table below). The growth will come from the international military installations and also from some commercial installations such as oil & gas industry.

Source: The company's documents.

2013

2015

CAGR 2013 - 2015

2020

CAGR 2013 - 2020

GE

22,600

23,100

1.1%

27,100

2.63%

CFM

2,300

2,400

2.15%

2,600

1.77%

Total

24,900

25,500

1.19%

29,700

2.55%

  • Oil & Gas installations:

The installations in the oil & gas industry are expected to grow by 4x from 144 installations in 2012 to 570 installations in 2020.

  • International military installations:

The installations for the international military are expected to grow from 3200 engines in 2012 to 4400 engines in 2020.

Others:

Others include Business and General Aviation ("BGA"), and Avionics and Digital Solutions ("ADS"). BGA unit primarily serves business and general aviation needs and offers engines for turboprops, light jets, mid-size jets, etc. along with related services. ADS unit provides avionics and digital solutions to the aviation industry.

Long-Term market outlook:

According to Boeing's latest estimates the long-term demand outlook for the passenger and freighter airplanes is healthy (see the table below). The demand is expected to come from the new fleet expansion as well as from the replacement of aging airplanes.

Boeing forecasted a long-term demand (from 2012 to 2032) of 35,280 new airplanes, valued at $4.8 trillion. It estimated that the 14,350 of these new airplanes (41 percent of the total new deliveries) will replace the existing aging airplanes, and the remaining 20,930 airplanes will be for fleet expansion. The CAGR is expected to be over 3.6% till 2032.

(click to enlarge)

Conclusion:

Aviation is one of the largest and most profitable industrial segments for the company. For the recent quarter the segment contributed about 21% of the company's total industrial revenue, and about 27.5% of the company's total industrial operating profit. The segment also contributed over 49%* of the company's total order-backlog.

*$114 billion out of $229 billion at the end of Q3, FY 2013.

The introduction of the new highly efficient engines will make sure that the company continue to win the new orders. This will make sure that the company's in-service fleet will keep growing in future. The growth in the in-service fleet will make it sure that the high-margin services revenues will also continue to grow.

2015 to 2020 will be a very critical time period for the segment. During the period, the segment is expected to go through a complete transformation, as the contribution from the new engines is expected to increase steeply during the period. The recent icing issue to some extent showed the risks associated with newly launched products as compare to time-tested products. Such issues can raise the R&D costs and can affect the margins negatively. Moreover, if not resolved quickly this type of issue can also hurt the brand image of the company.

The creation of the new production/assembly-lines requires heavy capital investments. The company intends to invest $3.5 billion in production facilities during 2013 to 2017. Moreover, the phasing out of old products and production-lines, and the introduction of the new products and new production-lines can increase the operating costs during certain quarters/periods.

Financially, in the last few years, the segment has been performing well with continuous growth in the revenues and operating profits with stable margins (see the chart below).

Data source: The company's documents.

All in all, the future looks bright for the segment with strong order backlog and the growing demand for the company's new engines, but the company will have to make it sure that the risks associated with the new product launches remain at the minimal levels, particularly the safety related issues.

Disclaimer: Investments in stock markets carry significant risk, stock prices can rise or fall without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.

This article reflects the personal views of the author about the company and one must read offer prospectus and consult its financial adviser before making any decision.

Source: GE: Flying High