General Electric: Space Race Just Getting Started (NYSE:GE)

General Electric (NYSE:GE) went from a conglomerate operating dozens of different businesses and financing solutions, but will soon be exclusively focused on its Aerospace division after spinning off its healthcare business later this year.

As such, while the healthcare and energy businesses remain stable and growing businesses, it’s the aviation and aerospace that has me most excited. I previously wrote about the company’s near-term focus on supplying plane makers like Boeing (BA) and Airbus (OTCPK:EADSY) with jet engines and other components as they continue to receive dozens of orders from airlines across the globe.

This factor alone is driving some impressive growth for General Electric’s core aviation business and is providing them with solid cash flow to invest more heavily in research and development for future technologies and solutions. Over the next decade or so, analysts at Citi (C) project industries like space tourism will reach more than $1 trillion in revenues by 2040 and companies like General Electric are set to be one of the major benefactors of that spending. These projections also do not include advancements and spending from governments around the world, which are almost certainly going to drive revenues in the space higher than the $1 trillion projections, I believe.

With both parts of the company’s aviation business, aviation and space, set to see meaningful growth over the next decade, I am increasingly bullish on the company’s long term prospects. Let’s dive a bit deeper.

Short Term Growth From Jet Engines

General Electric aviation currently holds around a 51% market share in the widebody aircraft engine market due to its superior capabilities and fuel savings and the company’s ability to manufacture large amounts of aircraft engines for the growing number of orders as travel rebounds from the COVID-19 pandemic.

In the most recent news, United Airlines (UAL) made a 100 plane order from Boeing for their 787 Dreamliner. For United, those aircraft hold 2 General Electric GENX-1B76 engines, which go for about $20 million a piece, which means that the company will be getting around $4 billion in revenues from this deal alone. Many other airlines have been using various grants and ticket price increases to further modernize their aircraft fleets.

Modernizing a fleet, if the airline can afford it, provides for 2 advantages. The first is that they can expand their services with more aircraft, which many airlines are doing in order to penetrate new markets, both domestically and internationally. The second if cost related, where not only are the newer planes more fuel efficient, which is the airlines largest single in-flight cost, but the newer jet engines also require less maintenance than the older planes, thus saving human working hours and part costs.

This should allow the company to generate meaningful sales volumes as it gears up to develop and improve on existing propulsion technology for both the jet engine and the aerospace markets. Since the space industry remains in its infancy and many companies and governments are spending heavily in this field, it’s important that a company which is going to supply this industry be able to scale up productions quickly, which I believe General Electric can.

Long Term Growth From Space And Beyond

When it comes to the company’s long term growth, GE Aerospace is in an interesting position. Although I do like Virgin Galactic (SPCE) for the space tourism play, it’s hard to really say which company in the industry will best perform given how far out we are from serious sales volumes.

I’ve written about this before in the EV (electric vehicle) industry with Blink Charging (BLNK). Whereas the exact company which was going to do best in the EV sector was a hard choice to make, the fact that they’ll all need charging stations and that funding for this endeavor will be plentiful by both private and public sources was never in doubt. Therefore, instead of guessing which EV manufacturer will do well, I invested in Blink. That play subsequently returned over 1,200% at its peak, and while the best performing EV manufacturer Tesla (TSLA) did in fact return a comparable percentage – the rest of the EV manufacturers, even the international phenoms, reported a significantly lower return over the same time period.

General Electric, I believe, is a prime example of that type of company in the aerospace industry which can benefit from the space race 2.0. Whether or not any given space exploration or commercial services company will make it won’t matter since they all need parts and engines. General Electric has been putting in the work to make sure they can supply these companies and various government entities with whatever they need to make this future a reality.

This will, I believe, be one of the company’s biggest money makers in the long run and it’s encouraging to see them invest more and more into solutions for the industry as it gears up for its first commercial flights and as the space race 2.0 heats up between some of the world’s largest economies.

How May This Materialize

As mentioned (and linked) earlier, Citi analysts project that the space tourism industry alone, without any government or other commercial spending, can reach revenues of over $1 trillion by 2040. Assessing what the company’s share of that will be is nearly impossible, but we can use the existing framework in the aviation space to make an educated guess.

The cost of a Boeing 787 Dreamliner is $189 million, with $40 million of that cost, or over 20%, is the cost of the 2 GE engines mounted on either side of the plane. While in the space industry the cost of the rockets themselves are not that high, given fuel and logistical costs, I think it’s safe to project that the company can maintain a 1% to 2% market share in the industry by 2040.

When we further account for all of the anticipated spending from the world’s leading governments in the race for space 2.0, I believe that we can see the industry overall swell to almost $2 trillion in spending by the year 2040, which can present the potential for General Electric making north of $20 billion annually from the industry with the aforementioned 1% to 2% market share.

With the company raking in about $20 billion from its aviation unit in 2021, this can potentially more than double their revenues by 2040 without accounting for the growth in the jet engine market. As with many other emerging industries, it’s likely that we won’t see much profits early on but as time passes by, I believe we can see a similar 8% to 10% profit margin as we do with jet engine business segment they currently report.

Currently, analysts projections call for the company to report a solid boost to EPS and sales over the next few years. I believe that this accounts for some of the company’s space industry investments but since they also include current estimates for the GE Healthcare segment, which is spinning off soon, it’s hard to gauge exactly how much it will boost their future sales and income figures.

Investment Conclusion: A Solid One

As we can see, the company is expected to report a roughly 22% growth rate to EPS over the next few years, which amounts to a roughly 10x multiple of share price to forward earnings per share. While the reasoning for this can be justified if you only account for the company’s core aviation business, I believe that they’ll begin raking in sales from their space industry offerings sooner than projected and that sales and income figures will likely outperform.

The space tourism industry alone is projected to grow at a 37% CAGR (compound annual growth rate) through 2031, as well as my belief that we’re likely to see governments spending more and more on advancements in this industry, all of which are likely to result in the company’s outperformance.

As General Electric continues to work on lowering its long-term debt load and thus decrease interest expense, cap their SG&A (selling, general and administrative) expenses and hold over $10 billion in cash and equivalents – I believe that the company is likely to maintain higher investments in the future of the space industry while keeping cash flow high and increasing margins.

As a result, I believe that the likelihood of the company outperforming current sales and income expectations is quite high and that the company’s fair value lies at about 15x forward earnings projections, resulting in them being undervalued by as much as 50% through 2030. This potential upside means that I believe the company will outperform peers and the broader market in that time period and as a result, I will be adding to my position throughout the coming weeks.

I remain increasingly bullish on General Electric’s long term prospects.