If I had $20B I Couldn’t Compete With Them: GE

After completing its final spin-off in April 2024, the company formerly known as General Electric has transformed into GE Aerospace (NYSE: GE) – a focused, pure-play aerospace powerhouse. While many investors still view GE through the lens of its conglomerate past, the streamlined business that remains represents one of the most compelling long-term investment opportunities in the industrial sector. Two key pillars support this investment thesis: the extraordinary barriers to entry in aircraft engines and the significant tailwinds from manufacturing reshoring to the United States.

The Impenetrable Moat: Aircraft Engine Barriers to Entry

GE Aerospace possesses one of the widest competitive moats in any industrial category. The barriers to entry in aircraft engines are not merely high – they are virtually insurmountable for new entrants. Several structural factors create this exceptional competitive protection:

1. Extreme Technological Complexity

Modern aircraft engines represent perhaps the most complex mechanical systems in commercial use today:

• Operating temperatures that exceed the melting point of the engine's metal components

• Rotational forces that place extraordinary stress on materials and design

• Reliability requirements that demand 99.99% operational uptime

• Efficiency demands that require continual innovation in materials science

These technical challenges can only be overcome through decades of accumulated engineering knowledge and practical experience. Unlike software, where innovation can occur rapidly, jet engine advancement follows a methodical, iterative path that cannot be significantly accelerated even with massive investment.

2. Regulatory Certification Requirements

Before an engine can be mounted on a commercial aircraft, it must undergo one of the most rigorous certification processes in any industry:

• Typical certification timelines span 5-7 years

• Testing requirements include hundreds of hours of certification flights

• Documentation requirements often exceed 100,000 pages

• Cost of certification can reach $1-2 billion for a clean-sheet design

These regulatory hurdles serve as a powerful deterrent to new entrants while reinforcing the position of established players like GE Aerospace who have navigated the process repeatedly.

3. Scale-Driven Research & Development

The economics of aircraft engine development create a formidable barrier:

• New engine programs typically cost $2-4 billion to develop

• Research on advanced materials and designs requires continuous investment

• Specialized testing facilities cost hundreds of millions to build and maintain

• Engineering talent with relevant experience is limited and concentrated among existing players

These dynamics create a powerful feedback loop where the leaders (GE Aerospace, Rolls-Royce, and Pratt & Whitney) have the scale to invest, which further entrenches their leadership positions.

4. Installed Base and Aftermarket Economics

Perhaps most significantly, the aircraft engine business model creates extraordinary customer lock-in:

• Once an airline selects an engine platform, switching costs are prohibitively high

• Engine life cycles span 25+ years, creating multi-decade customer relationships

• Aftermarket service and parts generate 3-4x the revenue of the initial engine sale

• Service agreements often span 15+ years, creating predictable, recurring revenue

This aftermarket dynamic means GE Aerospace doesn't just sell engines – it establishes decades-long annuity streams that provide both stability and reinvestment capital for next-generation technologies.

Case Study: The CFM LEAP Engine Success

The CFM LEAP engine program (a 50/50 joint venture between GE Aerospace and Safran) illustrates these barriers in action:

• Development began in 2008, with first flight in 2014 and certification in 2016

• Total development cost exceeded $3 billion

• Now powers approximately 75% of new narrow-body aircraft (primarily Boeing 737 MAX and Airbus A320neo family)

• Order backlog exceeds 10,000 engines, representing over $150 billion in future revenue (including aftermarket)

This program demonstrates how GE Aerospace's technological leadership translates into multi-decade market dominance and revenue visibility that few businesses can match.

American Manufacturing Renaissance: GE Aerospace's Reshoring Advantage

Beyond its formidable competitive moat, GE Aerospace stands to benefit significantly from the accelerating trend of manufacturing reshoring to the United States. This structural shift is driven by several converging factors:

1. National Security Imperatives

The geopolitical landscape has fundamentally changed, with aerospace increasingly viewed as critical national security infrastructure:

• The 2022 CHIPS and Science Act explicitly prioritizes domestic production of critical technologies

• Defense Department initiatives are increasingly focused on supply chain resilience

• Export controls on advanced technologies favor domestic production

• Growing bipartisan consensus on reducing dependencies on potentially adversarial nations

As a leading American aerospace manufacturer with significant defense exposure, GE Aerospace is ideally positioned to benefit from this policy shift, with potential for expanded defense contracts and government support for critical technology development.

2. Supply Chain Resilience

The pandemic and subsequent global disruptions have revealed the vulnerability of extended global supply chains:

• Aerospace manufacturers are prioritizing reliability over lowest-cost production

• Regional manufacturing clusters reduce logistics complexity and vulnerability

• Buffer inventory requirements favor shorter, more responsive supply chains

• Quality control concerns increasingly favor proximate production

GE Aerospace has been at the forefront of this transition, having already begun reshoring critical component manufacturing before the broader trend accelerated. The company's 83 U.S. manufacturing facilities provide a substantial footprint for further expansion as reshoring continues.

3. Advanced Manufacturing Economics

The economic calculus of manufacturing location has shifted dramatically:

• Automation has reduced labor cost advantages of offshore production

• Energy costs in the U.S. remain competitive globally, particularly relative to Europe

• Productivity advantages of U.S. manufacturing have widened

• Intellectual property protection concerns favor domestic production

• Rising wages in traditional low-cost countries have eroded their cost advantage

GE Aerospace's investments in advanced manufacturing technologies – including additive manufacturing (3D printing), which it pioneered for aerospace applications – position it to capitalize on these shifting economics.

4. Government Incentives and Financing

The policy environment now strongly favors domestic manufacturing:

• The Inflation Reduction Act provides substantial incentives for U.S. manufacturing

• Export-Import Bank financing increasingly supports domestic producers

• State-level incentives for manufacturing facilities have grown more competitive

• R&D tax credits favor companies performing research and production domestically

These incentives materially improve the economics of GE Aerospace's U.S. operations and investment plans.

Case Study: GE Aerospace's Additive Technology Center

GE Aerospace's Additive Technology Center in Cincinnati exemplifies its leadership in reshored, advanced manufacturing:

• 125,000 square foot facility dedicated to industrializing 3D printing for aircraft components

• Houses over 90 industrial 3D printers representing $100+ million investment

• Enables production of complex engine components that cannot be manufactured using traditional methods

• Has reduced the number of parts in certain engine components by over 90%, improving reliability while reducing cost

This facility represents the future of American aerospace manufacturing – highly automated, technologically advanced, and creating high-value components that justify domestic production costs.

The Investment Case: Why GE Aerospace Deserves a Premium Valuation

GE Aerospace's combination of extraordinary barriers to entry and positioning for manufacturing reshoring creates a compelling investment case. However, to assess whether this translates into an attractive opportunity at current prices, we must consider the company's financial profile and valuation.

Financial Profile

• Revenue Growth: Mid to high single-digit organic growth, driven by:

  • Commercial aerospace recovery (air travel now exceeding pre-pandemic levels)

  • Military spending increases in response to global tensions

  • Expanding installed base driving aftermarket growth

• Margin Trajectory: Operating margins of approximately 19% in 2024, with clear path to 20%+ by 2026 through:

  • Improved product mix (higher margin LEAP engines replacing older models)

  • Increased services contribution to revenue

  • Operational efficiencies from advanced manufacturing technologies

• Free Cash Flow Conversion: Targeting 90%+ free cash flow conversion from net income, supported by:

  • Reduced inventory requirements through improved supply chain management

  • Declining capital expenditure needs as major capacity investments complete

  • Working capital improvements from digital transformation initiatives

Growth Vectors

Several specific growth drivers support the long-term compounding potential:

1. Narrow-Body Aircraft Demand: Boeing and Airbus have order backlogs exceeding 13,000 aircraft, primarily narrow-body planes powered by the CFM LEAP engine.

2. Defense Modernization: Increased global defense spending, particularly in air power, supports growth in GE Aerospace's military engine business.

3. Aftermarket Expansion: The growing installed base of GE engines (particularly the LEAP) will drive decades of high-margin aftermarket revenue.

4. Next-Generation Technology: GE Aerospace's RISE (Revolutionary Innovation for Sustainable Engines) program targets 20% better fuel efficiency by the 2030s, potentially positioning the company for the next generation of aircraft.

5. Advanced Materials and Manufacturing: Breakthroughs in ceramic matrix composites and additive manufacturing continue to enhance GE Aerospace's competitive advantages.

Detailed Valuation Analysis

Our fair value estimate for GE Aerospace is $198 per share, representing an enterprise value/2025 EBITDA ratio of nearly 22 times. This valuation is built on a thorough analysis of the company's long-term growth potential and cash generation capabilities.

The foundation of this valuation rests on GE's dominant market position: "With GE's engines powering nearly three fourths of global commercial flights, the biggest profit driver for the company is simply more airplanes continuing to take off and land."

Revenue Growth Projections

The valuation model incorporates differentiated growth rates across GE Aerospace's business segments:

• Manufacturing segment: 14% compound revenue growth over the next decade

• Commercial aftermarket business: 6.2% compound revenue growth over 10 years, with improving margins

• Overall revenue growth (including defense and propulsion): 8.4% compound growth through 2034

This balanced growth profile reflects both the rapid expansion of new engine programs and the steady growth of the highly profitable aftermarket business.

Margin Expansion Opportunity

The operational improvements implemented by CEO Larry Culp and his team provide confidence in GE Aerospace's ability to expand margins despite the initial profitability challenges of new engine programs:

• Commercial aerospace margins approaching 27% in the forecast period

• Defense margins projected to reach just over 22% early next decade

• Stable operating margins in contracted aftermarket services

• Gradually improving profitability in time & materials work as GE benefits from learning curve efficiencies

These margin projections reflect the company's operational excellence initiatives and the increasing contribution from higher-margin aftermarket services.

Capital Requirements and Free Cash Flow

While the jet engine business is capital-intensive, GE Aerospace's financial model supports strong free cash flow generation:

• Projected capital expenditures and research & development spending of nearly $16 billion over the next 10 years

• CapEx expected to average 3.4% of sales

• R&D spending forecasted at 6.7% of sales

• Long-term free cash flow conversion target of 100% is achievable

These investments support critical growth initiatives including:

• Open-fan (CFM RISE) engine development

• Hybrid electric propulsion systems

• Adaptive engine technology for next-generation fighter programs

Long-Term Cash Generation and Capital Return

The cumulative financial impact is extraordinary: "Our forecasts offer a picture of GE Aerospace generating over $93 billion of free cash flow over the next decade, most of which the company has pledged to return to investors."

Management's capital allocation policy focuses on returning upwards of 70% of available cash flow to shareholders through:

• Stock repurchases reducing share count

• Increasing dividend payments (projected to more than double by 2028 from 2024's declared $1.12 level)

Discount Rate and Valuation Methodology

Using a weighted average cost of capital (WACC) of 8.6% to discount projected free cash flows yields our $198 fair value estimate. This approach appropriately balances the company's business quality and growth potential with the inherent risks in aerospace manufacturing.

Valuation in Context

As of May 2025, GE Aerospace trades at:

• Forward P/E ratio: ~24x

• EV/EBITDA: ~16x

• Free Cash Flow Yield: ~3.8%

While these multiples appear elevated relative to the broader industrials sector (which trades at an average forward P/E of ~18x), several factors justify this premium:

1. Superior Business Quality: Few industrial businesses match GE Aerospace's combination of barriers to entry, recurring revenue, and long-term visibility.

2. Above-Average Growth Profile: The projected 8.4% compound revenue growth significantly exceeds the industrial sector average of 3-4%.

3. Margin Expansion Opportunity: The path to 27% commercial aerospace operating margins represents substantial upside to earnings and cash flow.

4. Balance Sheet Transformation: Following the separation from GE's legacy liabilities, GE Aerospace maintains a strong investment-grade balance sheet with significant financial flexibility.

5. Reshoring Tailwinds: The multi-year reshoring trend provides a structural growth tailwind not fully reflected in consensus estimates.

Sensitivity Analysis

The valuation is most sensitive to:

• Long-term growth rate: Each 1% change impacts fair value by approximately $20 per share

• Operating margin: Each 1% change impacts fair value by approximately $15 per share

• WACC: Each 0.5% change impacts fair value by approximately $25 per share

Even under more conservative assumptions (5% long-term growth, 19% terminal operating margin, 9% WACC), the analysis suggests a fair value approximately in line with the current share price, providing a reasonable margin of safety.

Conclusion: A Core Holding for Quality-Focused Investors

GE Aerospace represents that rare combination of quality and growth that characterizes exceptional compounding investments. The virtually impenetrable barriers to entry in aircraft engines provide extraordinary competitive protection, while the accelerating trend of U.S. manufacturing reshoring offers a structural tailwind that could persist for a decade or more.

At current valuations, investors are not paying an unreasonable premium for these quality characteristics. While the stock may appear expensive on traditional metrics, the company's long-term growth trajectory, margin expansion potential, and exceptional business quality justify a premium multiple.

For investors focused on building a portfolio of high-quality compounding businesses, GE Aerospace deserves consideration as a core industrial holding. The combination of competitive moat, growth potential, and reasonable valuation creates an attractive proposition for patient, long-term investors seeking exposure to a world-class aerospace franchise positioned for sustained outperformance.

This blog post represents my personal views and is not investment advice. Readers should conduct their own research before making investment decisions.

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