GE Aerospace (GE)

Total return at 5 years: 4.5%/year = 3.7% appreciation + 0.8% dividend. The target price ($371) is ex-dividend; the $13 in dividends collected over 5 years are added separately.

The methods disagree: one places the value today above the price ($309) and the other below.

Today — fairly valued: at $309 trades close to its value discounted to today (~$309); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($371) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$193.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($309) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The price discounts growth (11.8%/year) above our base case (9.0%/year) → it is priced for a demanding scenario and leaves little cushion against a slowdown.

That growth implies ~$15.5 bn of owner earnings in year 5 (vs ~$13.7 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on EV/EBIT (resultado operativo). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Rolling grid: the base year is the real TTM (revenue $50.6bn to Jun-2026, XBRL) with operating income of ~$10.2bn. GE Aerospace is valued on EV/EBIT: stock-based compensation is low (~0.7% of revenue) and does not distort operating income, and the business is an engine manufacturer + a decades-long services aftermarket (the annuity, ~70% of revenue). Operating income grows ~13%/year on the aerospace cycle recovery + the compounding aftermarket + margin expansion (with a transitory dip from the LEAP ramp —Q2'26 margin −130 basis points— that reverses as the fleet accumulates flight hours). EV/EBIT compresses toward ~20× over five years: today's multiple reverts toward the high end of the aerospace band (15-22×), still generous but far below today's — the §2 discipline (quality priced for perfection). Buybacks (~2.4%/year, funded with free cash flow) are modeled in the share path; net debt (~$11bn) goes in the bridge. Watch: execution of the LEAP ramp and the legacy insurance book in run-off ($36.9bn of liabilities, capital at 300%).

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $371 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $309, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $371 in 5 years plus $13 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $309. Against the current market price ($309), the margin of safety is 0.2% (trades below the maximum → there is margin) and the total return at that price would be 4.5% annually.

• Multiple vs the sector. EV/EBIT ~32× — far above the aerospace band (15-22×). Priced for perfection.
• The archetype's band. The aftermarket justifies a premium over the generic industrial → aerospace band 15-22× EV/EBIT; GE at the high end of that band by year 5 (18×), but well below today's multiple.
• Margin of safety. 5-year base case ~$371 vs. price ~$309 → total return +5%/year. It trades close to intrinsic value, far from the required margin of safety.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (101%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• ROIC vs the 10% bar. ROIC ~28% — well above the bar, the hallmark of an aftermarket with high switching costs. Exceptional-quality franchise.
• Cash quality. High and growing free cash flow, backed by the recurring aftermarket and backlog advances. Low stock-based compensation.
• Balance sheet. Net debt ≈ US$8.1bn, moderate against the cash flow it generates. ⚠️ But the insurance legacy (US$36.9bn of liabilities, capital at 300% of the control level) is a complexity and an inherited capital demand.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

The engine of a jet-engine franchise is the installed base times the services aftermarket. GE Aerospace has ~50,000 commercial engines installed generating service for decades (~70% of revenue, at higher margin); every LEAP delivery (1,802 units in 2025, +28%) grows that base and the future annuity. The contracted backlog (US$190.6bn, +11%, 85.5% services) is aftermarket revenue already signed. Equipment (like the LEAP) grows in volume but at a relatively low margin until the fleet accumulates hours and shop visits (higher margin) become more frequent.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real, not nominal. The growth is real: growing installed base + traffic recovery + the LEAP ramp. The backlog (US$190.6bn) backs it up.
• Growth engine. Compounding aftermarket + the LEAP ramp (+28% of deliveries) + margin expansion as the fleet matures. Long runway.
• Cyclicality + execution. The aerospace cycle and LEAP ramp execution (durability, time on wing, supply chain) are the risks to the projected growth.

• Relevant in 10 years (recurrence). Jet engines are critical infrastructure; the installed base generates service for decades. Very high recurrence (the aftermarket is ~70% of revenue).
• Pricing power. Strong in the aftermarket: the engine owner must use approved parts and service — high switching costs on a captive base.
• Moat and its direction. Wide moat (installed base + regulatory/development barriers + switching costs), stable: the LEAP ramp grows the installed base, which is size and not direction. Among the best in the industry.
• Cyclicality. Cyclical (tracks air traffic), but the aftermarket (services annuity) cushions it versus a pure equipment manufacturer.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net debt / EBITDA 1.0x
• ✓Interest coverage (EBIT / interest)11.3x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 101% of ROIC
• ✓Value creation (ROIC − 10% bar)+18pp
• ✓Malinvestment test (capex vs incremental ROIC)Productive investment (1.6x)
• !Float / working capitalConsumes cash $0.1 bn (positive WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.7% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Net debt ≈ US$8.1bn, moderate for the cash flow it generates — clean balance sheet after the spin-off, with upgraded credit ratings in 2025 (Moody's to A3, S&P to A-).
• Insurance legacy. Run-off of ERAC and UFLIC: US$36.9bn of liabilities, statutory capital at 300% of the authorized control level, plus the Bank BPH litigation (Poland, US$2.3bn reserve) — a tail that could require capital.
• Sustainability of the return. Free cash flow comfortably covers the dividend and the buyback. The dividend is low (0.6%) but growing from a low base.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Skin in the game. Culp owns 1,612,480 shares; the CEO ownership requirement is 10× base salary. He came from Danaher, where he built the lean management system he transplanted to GE as FLIGHT DECK. No founder control — he's a top-tier professional CEO.
• Capital allocation. Strong discipline: buybacks + growing dividend, funded by free cash flow. The insurance legacy consumes a portion of capital via the capital-maintenance agreement.
• Efficiency / integrity. The FLIGHT DECK lean system (from Danaher) turned GE from a conglomerate in crisis into a focused franchise — proven execution.

• It's not cheap: trading at ~32× EV/EBIT, far above the aerospace band (15-22×).
• The market is paying for aftermarket quality (the decades-long annuity), the cycle recovery and the LEAP ramp — with guidance raised over the past year and analyst consensus above the current market price.
• The consensus is pricing in the aftermarket compounding and the aerospace cycle staying firm; the method acknowledges the quality but reverts the multiple toward a still-generous band, where the compression eats up the growth.

This isn't a punished stock — it's the opposite case: a top-quality franchise priced for perfection. The aftermarket and the moat justify a premium over a generic industrial, but today's multiple presupposes sustained flawless execution. Without a discount catalyst (missing buyers or motivated sellers), the return depends on growth outpacing the multiple compression.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -8%/year (-35% total): the margin of safety protects the downside. The bull (+13%/year, +81% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Valuation. The central disconfirmer: at ~32× EV/EBIT it's discounting flawless execution; any disappointment triggers a sharp multiple compression.
• LEAP-ramp execution. Durability, time on wing and repair turnaround, plus the constrained supply chain — named as an explicit risk in the 10-K.
• Aerospace cyclicality + defense dependence. A drop in traffic hits equipment and, with a lag, the aftermarket; in defense, the business depends heavily on the U.S. Department of War budget and allied governments.
• Insurance legacy and litigation. US$36.9bn of run-off liabilities with capital at 300% of the control level, plus the Bank BPH litigation (Poland) — could require capital injections.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 28% above the 10% bar, but the margin is limited (+0%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 9% at a multiple/growth of 3.6 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 3% (EBIT/EV) + ROIC 28% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 12% vs our 9%: priced for perfection, no favorable mispricing.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -9%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, intangibles, efficient scale, cost advantage → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  The price implies 12% vs our 9%: coherent, but at the optimistic end of the range.