- General Electric’s Aviation division has hit a huge home run with the new LEAP engine. The new engine is already General Electric’s best-selling engine of all time.
- General Electric has already booked $78 billion worth of orders for the new LEAP engine set to go into service in 2016.
- This news has been lost on investors due to the focus on the Alstom acquisition and focus on short-term noise in the earnings report.
- This has created an excellent buying opportunity for long-term dividend investors. In the following article I will lay out the reasons why.
General Electric's (NYSE:GE) stock has taken a hit in recent days due to questions raised about the possibility of the turnaround plan stalling out. Many still question the validity of the Alstom (OTCPK:ALSMY) acquisition. I believe this has created an excellent buying opportunity in the stock. In the following article I will lay out my reasons as to why.
The bottom line regarding the Alstom acquisition
The Alstom deal was an important move for General Electric. Nevertheless, the synergies between the two companies will take time to play out. In the end the return on investment will be worth it. Furthermore, the acquisition is an integral part of the company's goal to have 75% of earnings derived from industrial operations. The deal is targeted to close in 2015 and by 2016 is expected to add $0.06 to $0.09 per share to the bottom line according to the conference call. You can read the full transcript here. The bottom line is the level of focus on this one deal has masked some other major strides the company has made in other areas. For one, the company's new LEAP engine has already broken sales records for the company, yet no one has even mentioned this fact.
General Electric seems to always be one step ahead
General Electric always seems to be one step ahead of the competition as far as I can tell. Take General Electric's new LEAP jet engine for instance. Buried in deep behind all the headlines regarding the Alstom acquisition was a story regarding the huge sales success for the company's new innovative LEAP engine. The information regarding the new engine's specifics was derived from this report.
The new LEAP engine has already broken sales records
The new LEAP engine will not enter service until 2016. It will be installed on the Airbus A320neo initially. Even so, the LEAP engine has already become General Electric Aviation's best-selling engine of all time. Over 6,000 confirmed LEAP engine orders from 20 countries have been booked. The value of these orders tallies up to more than $78 billion in total revenues. The company is currently ramping up production capabilities to handle the new business.
Seven new assembly plants in the past seven years
General Electric Aviation has opened up seven new assembly plants in the U.S over the past seven years. General Electric plans to open another assembly plant in Indiana specifically to build the new LEAP engine. The question is what is all the excitement about? What is so special about the new engine?
The LEAP engine is highly fuel efficient
The LEAP is being developed by CFM International. This is essentially a 50-50 joint venture between General Electric and a French company named Snecma. The LEAP engine is the world's first passenger jet engine which will have a 3D printed fuel nozzle and be made with next-generation materials. The engine has parts made from new heat-resistant ceramic matrix composites and breakthrough carbon fiber fan blades woven in all three dimensions at once.
By employing these new lighter weigh materials and designs, the engine is expected to save carriers up to $1.6 million in fuel saving per plane per year on average. That is the key to the engines success. Fuel savings of this nature truly are a leap ahead of the competition. Moreover, the market for the engine is vast.
There are currently three versions in production of the engine. These engines are each designed specifically for three single-aisle commercial planes, the A320neo, Boeing 737 MAX and COMAC C919. Boeing (NYSE:BA) estimates that the single-aisle market will represent 70% of all commercial airplane deliveries over the next twenty years. This is a massive opportunity in the making. Based on the stock's current performance, I do not believe this upside is currently priced into the stock.
Never look a gift horse in the mouth
I see the recent consternation regarding General Electric's stock as a major buying opportunity. The key fundamental metrics for General Electric are trending higher on a long-term basis. Revenues are up and projected to grow. Revenues are what it's all about. Earnings per share growth is strong. The earnings per share of a company is conceivably the most important statistic to understand before investing in a company's stock. Each time you consider starting a position in a stock, you should prudently scrutinize its earnings information. Moreover, General Electric has one of the lowest forward P/E ratios of five of the largest conglomerates at 14.23. Furthermore, General Electric is focused on streamlining operations, divesting itself of unprofitable business units, and spinning off risky financial units. General Electric has strong free cash flow and a sizable cash hoard. General Electric has done a tremendous job of managing its finances and has a substantial cash hoard of approximately $90 billion. Finally, General Electric's backlog is massive and continues to grow. The backlog currently stands at $244 billion. This is significantly higher on a year-over-year basis. Also, the backlog has increased exponentially over the last few years and the inroads made by the LEAP engine and the Aviation division have been a major part of this success.
Aviation division inroads
General Electric's Aviation business is currently delivering on its promises for growth and appears well positioned for the future. The aviation division has an unprecedented installed base which is growing. The company is making investments in all segments of the market and securing service contracts as well. This is evidenced by the large and growing services and product backlog such as the LEAP engine. General Electric Aviation is committed to technology leadership in the industry. The company provides value to its customers by constantly trying to outdo itself. Nonetheless, there are always downside risks to any investment. In the following section I will highlight some of the major ones I see at this point in time.
The market is at all-time highs just as geopolitical and macroeconomic risks appear to be spiking. If the world does go to heck in a hand basket so to speak, this could be trouble for General Electric. Moreover, the Fed plans to stop QE in October. If you have any semblance of a memory, you should remember this was devastating to the stock market the previous times QE was pulled. I see a high probability the market may be in for a correction of some magnitude in the near future. For this reason, I would definitely layer in to any position over time to reduce risk.
General Electric is a great investment currently for anyone with a long-term time horizon. The dividend yield currently stands at 3.38%. Furthermore, General Electric offers potential shareholders the opportunity for capital gains as well as income production with the stock currently selling at a significant discount. If the global economic recovery stays on track, significant shareholder wealth should be created over the coming years. I feel General Electric offers an excellent buying opportunity for all investors today and the success of the LEAP engine underpins my thesis.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.