GE Part IV: Aviation Segment Analysis

| About: General Electric (GE)

Summary

This article offers up a deep analysis into the aviation segment of General Electric.

GE's aviation segment is compared to Boeing and the Aerospace segments of Honeywell and United Technologies.

This analysis shows the value of GE's aviation segment is valued at nearly $75 billion.

GE's aviation segment has shown consistent strong growth over the last four years and appears to be stronger than the competition.

Company Background

General Electric (NYSE:GE) is a massive corporation that is more or less eight individual companies operating under one roof. This is part IV of an eight part series taking a deep dive into GE's eight individual operating segments. Please refer to my previous articles investigating GE for further company background.

GE: The Sum Of All Of The Parts

GE Part I: Power and Water Segment Analysis

GE Part II: Oil and Gas Segment Analysis

GE Part III: Energy Management Segment Analysis

Company Breakdown

One method of analysis is to look at each segment individually. The analysis in this article will focus on revenues, profits, growth and opportunities for the aviation segment. All GE segment revenue and profit numbers for 2010 through 2013 were collected from the 2013 annual report. Data for 2014 was collected from the 2014 third-quarter report.

GE's Aviation Segment

According to GE the aviation segment offers engines, systems and services for the aviation industry. GE aviation designs and builds products for commercial, military and business customers. GE's aviation segment was involved in building America's first jet engine in 1941. The segment has seen major advances in technology throughout the segments history and is critical in solidifying the segment's leadership position in the aviation industry.

In 2013, the aviation segment had revenues of $21.9 billion and profits of $4.3 billion. Compared to 2012, revenues increased 9.6% and profits increased 16%. The increase in revenue from 2012 to 2013 was driven through acquisition (+$0.5 billion), increased volume (+$1.4 billion) and price increases (+$0.6 billion). The profit increase was a result of higher prices and higher volume. Profit margin increased from 18.7% in 2012 to 19.8% in 2013. This improved profit margin shows operating leverage and gains in operating efficiency. Profit margin should continue expanding as revenue growth continues. Similar to the other segments, GE is finding ways to extract higher profits from each dollar of revenue. This improving profit margin is a great sign GE is cutting costs and not hurting the company.

Estimating future revenue for each segment can easily be accomplished as GE outlines their order backlog for each segment. GE reported increased orders for the aviation segment in 2013 of $27.2 billion. The segment's backlog stood at $125.1 billion at the end of 2013. The $125.1 billion breaks down to $28.4 billion in equipment and $96.7 billion in services. The backlog at the close of 2012 stood at $22.9 billion for equipment and $79.5 billion for services. Total backlog increased 22.2% from 2012 to 2013, with a 24.0% increase in equipment and a 21.6% increase in the services backlog.

Through the first nine months of 2014, the aviation segment generated revenues of $17.566 billion and profits of $3.576 billion. Revenues for 2014 decreased 11.6% and profits increased 15.5%. The chart below shows the growth through the first three quarters of 2013 compared to the first three quarters of 2014. One area I like to keep an eye on is the profit margin, from the information below; the profit margin is showing nice improvement.

Q3 YTD 2013

Q3 YTD 2014

Growth

Revenue

15.741

17.566

11.6%

Profit

3.095

3.576

15.5%

Profit Margin

19.7%

20.4%

3.5%

In 2014, this segment of GE did have revenue generated as a result of acquisitions. The main source of acquisition driven revenue came from the Avio Aviation group which was acquired in August of 2013. In the third quarter of 2014, GE also announced the acquisition of a helicopter leasing agency, Milestone Aviation Group for $1.78 billion. This acquisition will offer opportunities for GE Capital to generate returns through utilizing resources in GE aviation. The bump in profit margin from 2013 to 2014 offers encouragement that GE is realizing operational efficiencies form combining similar businesses. Additionally, GE noted in their 2014 third quarter report that overall backlog increased 21% year over year and services climbed 10% which offers guidance for future revenues. GE does not break down the backlog to operating segments quarterly, only offering this information in the annual reports. Below is a chart showing revenue, profit and profit margin from 2010 through 2013, all values are in billions for the aviation segment.

2010

2011

2012

2013

Δ '10-'11

Δ '11-'12

Δ '12-'13

Ave '10-'13

Revenue

17.619

18.859

19.994

21.911

7.04%

6.02%

9.59%

7.55%

Profit

3.304

3.512

3.747

4.345

6.30%

6.69%

15.96%

9.65%

Profit Margin

18.8%

18.6%

18.7%

19.8%

-0.69%

0.63%

5.81%

1.92%

Similar to previous segments, GE has grown the aviation segment organically, through collaborations and acquisition. Some of these acquisitions include the aforementioned Avio Aviation as well as Morris Technologies & Rapid Quality Manufacturing. Some strategic partnerships include working with Turbocoating SPA, Sigma Labs, Parker Aerospace and Mitsui & Co. These acquisitions and partnerships have added to GE's leadership position in the aviation industry. The aviation segment of GE is a profit machine. The aviation industry is seeing strong growth as the commercial airline industry is currently going through an upgrade cycle of airplanes. As GE manufactures engines for quite a few of these new planes, GE is participating in this growth and will participate for the foreseeable future.

The Competition

Let's take a look at how GE compares to the competition in the aviation sector. The three comparisons I selected were Boeing (NYSE:BA), the aerospace segment of Honeywell (NYSE:HON) and the aerospace segment of United Technologies (NYSE:UTX). These comparisons are a little cloudy as GE partners with all three of these companies to make various components of airplanes. As all four of these companies work together, we can compare operating efficiency of each and see who has the premier business in this sector. All of the values below were gathered from the company's 2013 annual reports and revenue/profit numbers are in billions.

GE Aviation

2011

2012

2013

Δ '11-'12

Δ '12-'13

Ave '11-'13

Revenue

18.859

19.994

21.911

6.02%

9.59%

7.80%

Profit

3.512

3.747

4.345

6.69%

15.96%

11.33%

Profit Margin

18.6%

18.7%

19.8%

0.63%

5.81%

3.22%

Boeing

2011

2012

2013

Δ '11-'12

Δ '12-'13

Ave '11-'13

Revenue

68.735

81.698

86.623

18.86%

6.03%

12.44%

Profit

4.018

3.9

4.585

-2.94%

17.56%

7.31%

Profit Margin

5.8%

4.8%

5.3%

-18.34%

10.88%

-3.73%

Honeywell Aerospace

2011

2012

2013

Δ '11-'12

Δ '12-'13

Ave '11-'13

Revenue

11.475

12.04

11.98

4.92%

-0.50%

2.21%

Profit

2.023

2.279

2.372

12.65%

4.08%

8.37%

Profit Margin

17.6%

18.9%

19.8%

7.37%

4.60%

5.98%

United Technologies Aerospace

2011

2012

2013

Δ '11-'12

Δ '12-'13

Ave '11-'13

Revenue

12.711

13.964

14.501

9.86%

3.85%

6.85%

Profit

1.867

1.589

1.876

-14.89%

18.06%

1.59%

Profit Margin

14.7%

11.4%

12.9%

-22.53%

13.69%

-4.42%

GE's aviation segment has the second strongest revenue growth behind Boeing over the time frame evaluated. Boeing, GE and United Technologies all show strong revenue growth, with Honeywell showing small revenue growth. Strong revenue growth across the competition is expected as the aviation sector has seen strong growth over the last 4-5 years. Additionally, order backlog in this sector has grown along with strong revenue offering visibility into future revenues. GE saw the strongest profit growth over the time frame evaluated, but all companies showed positive profit growth. GE has the highest average profit margin and had the second highest profit margin growth over the time frame evaluated. When comparing the aviation segment of GE to the competition, some generalizations can be made:

  • The aviation sector is showing nice returns over the time frame evaluated
  • The profit margin appears strong for the suppliers (GE, HON, UTX)
  • All companies/segments of companies had positive revenue and profit growth over the time frame evaluated

As the financials show opportunities exist in the aviation sector. That would explain why GE continues to search for acquisitions to increase the aviation exposure of the company. As of 2014, the aviation segment of GE seems to be in a hot industry and shows strong fundamentals.

One thing to keep in mind is the aviation segment is only a small piece of the GE total P/E. Based on 2013 revenues, the aviation segment is only 15% of the overall company. GE aviation is the largest industrial segment within GE, only GE Capital has a larger portion of revenue of the parent company. Below is each company's P/E ratio from Google Finance at the time of this analysis.

P/E Ratio

GE

17.52

BA

18.9

HON

18.83

UTX

16.43

Considering the analysis above, GE should garner the highest PE, Honeywell in second, Boeing in third and United Technologies in fourth. I am making these suggestions based on revenue and profit growth over the timeframe. Additionally, consistency is just as important as strong revenue growth.

Valuing the Aviation Segment

As done in my initial article, GE: The Sum of All of the Parts, I just took the average of the competition and estimated the value of this segment. According to FactSheet, the earnings expected in 2014 for the S&P 500 are $128.57, giving the market a multiple of 16.09 as of market close on Monday, November 24, 2014. Utilizing these numbers, an average stock should trade at the market multiple. I feel that based on the consistent and strong growth rate over the last several years that the aviation segment of GE should trade at a premium. For valuing growth stocks I like to apply a value of 1.5x the growth rate. Multiplying the growth rate from 2010 through 2013 of 11.33% by 1.5, I feel a fair multiple would be 16.95. Applying the calculated P/E of 16.95 to GE's 2013 segment profit of $4.345 billion, the aviation segment can be estimated to a value of $73.65 billion. The $73.65 billion is right in line with the $75.3 billion suggested in the original analysis. GE's aviation segment is trading more or less in line with the P/E of the overall company.

Conclusion

GE is a very complex company operating in eight different segments. An overall estimate for GE can be made by evaluating each individual segment as a standalone company. Comparing GE to the competition, we see that GE is showing similar growth as the competition. Based on the financials for GE's aviation segment, I feel this segment should be trading at a premium to the market. We are able to estimate that the aviation segment is contributing $73.65 billion of the overall $271 billion value of the total company. Please see the Company Background section above for links to Power & Water, Oil & Gas and Energy Management segment analysis articles. Please continue watching Seeking Alpha for the upcoming analysis of GE Healthcare, Transportation, Appliance and Light and GE Capital.

Disclosure: The author is long GE, BA.

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.

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