Al Root

GE Aerospace investors have a problem: Things are going great.

In fact, the stock has done so well, it now boasts a sky-high valuation that can be hard to justify.

GE Aerospace stock trades for about 38 times estimated 2025 earnings and 32 times estimated 2026 earnings. The S&P 500 trades for closer to 22 times and 20 times, respectively. Still, it's important for investors to take a big step back.

Is 38 times the right price? History is no help: The company has only been independent since its separation from GE Vernova on Apr. 2, 2024. Before that, there were some hard times with depressed earnings while CEO Larry Culp worked to turn around the American manufacturing icon. Before Culp and the hard times, GE was a conglomerate trading closer to the S&P 500 multiple.

Relative valuations can help. Aerospace parts supplier TransDigm trades for about 34 times estimated 2025 earnings. That's close to GE, offering investors some comfort. But engine-making peer RTX, however, trades for only 20 times.

Comparing multiples to similar firms is called relative valuation.

"A focus on relative valuation comparisons to industry peers can sometimes fail to capture upside opportunities that arise when the market begins to rerate a best-in-class company to a best-in-class multiple," wrote Deutsche Bank analyst Scott Deuschle in a Friday report.

GE is a leading engine maker. Roughly three out of four commercial flights are powered by GE for CFM engines. CFM is a 50/50 joint venture between GE and France's Safran.

Relative valuation has its drawbacks, though.

"Benchmarking valuation to peer averages becomes increasingly less useful the further the company being valued moves from the average," added Deuschle. In other words, investors risk anchoring their valuations to the wrong number.

He has a couple of solutions for investors. First, there are price-to-earnings-to-growth, or PEG, ratios. S&P 500 earnings are expected to grow roughly 8% to 10% a year for the coming few years, according to FactSet. GE Aerospace earnings are expected to grow about twice as fast between 2024 and 2027.

Those numbers give GE Aerospace a PEG ratio of about 2.2 times. (PEG ratios change based on the number of years used for earnings growth and the PE ratio selected.) The comparable S&P 500 PEG ratio is closer to 2.5 times.

From that angle, GE Aerospace stock isn't too expensive. Deuschle also points out that investors can use a discounted cash flow, or DCF, valuation. It projects cash flows far in the future at an interest rate to arrive at a fair price to pay today.

His DCF suggests "the stock was trading at a substantial discount to intrinsic value," added Deuschle. "We view this as likely our strongest argument for continued upward rerating in GE shares."

He rates GE Aerospace stock Buy and has a $261 price target for the stock. That values GE Aerospace shares at 40 times the consensus 2026 earnings estimate. It's also about 25% higher than the stock's recent levels.

Overall, Wall Street likes GE Aerospace stock. Almost 90% of analysts covering the company rate shares Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. The average analyst price target for GE Aerospace shares is about $229.

GE Aerospace stock was down 1% in midday trading Friday at $206.30, while the S&P 500 was up about 0.1% and the Dow Jones Industrial Average was down about 0.2%.

Through midday trading, GE Aerospace stock, adjusted for the GE Vernova spin, was up about 76% over the past 12 months.

Write to Al Root at allen.root@dowjones.com

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February 14, 2025 12:02 ET (17:02 GMT)

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