GE Aerospace 是一家顶级品质、由售后市场驱动的发动机企业，投入资本回报率接近40%，但以40倍现金流估值偏贵：在盈利增长约10%的情况下，只有35至40倍的退出倍数才能带来不错的回报，即便30倍也仅剩高个位数回报。目前并未持有，仅列入观察名单，若价格再便宜一些会考虑买入。

And today we talk about a holding that is an insane 30% of his $50 portfolio, and the company is GE Aerospace. And And we'll be talking about GE Aerospace, which is actually the biggest position in Sir Christopher Hohn's portfolio.

And with GE being more than 30% of his $50 portfolio, that is just it's insane. But, I feel like GE Aerospace really is the pinnacle of quality in that industry and it's definitely valued that way, too, though.

It's no secret to the market how good of a business this is. It's not cheap. That's for sure.

But, I think if you adjusted to say, you know, this growth and quality at any price, GE Aerospace is actually a company that fits that profile quite well cuz I feel like it's just a company that we need to cover so that if at any point there's a more severe drawdown, we are ready to buy that stock.

We are already in a bit of a a small drawdown at the time of recording here. GE's shares are down about 20% recently. And of course, that is a pretty small blip when you zoom out and look at their meteoric rise post COVID.

how about you just take a moment and walk us through the history of the company and and what it is exactly that GE does and then how that differs from their peers in the aviation space of Heico and TransDigm.

Yeah, GE has an interesting history, I would say. So, going from Leonardo da Vinci's first put it heights to the actual first motorized airplanes and then eventually landing on the moon and working on going to the Mars... all of that is basically happening in just 500 years...

Aviation innovation would have definitely been slower if they would have needed to count on more value versus.

I got to say it gave me a pretty good feeling about all the flights that I usually went on when I went into the hall where all the GE engines were. So, those seem like the type of engines that I would want to have on a plane when I step foot into it.

But, the aviation business of GE is actually older than most people would think. So, it started in 1917 in the middle of the First World War where the US government asked GE and an engineer called Sanford Moss to build a turbo supercharger for military aircraft.

So, actually going back in time, the First World War was something that basically was the start for GE. But then by the end of the Second World War, GE had built more than 100,000 of those turbo superchargers.

And that's why in I think it was 1941, the US Army was sent the first British jet engine and they decided to give that design to GE to basically scale that and build the same for the US.

And the engine which is called the IAE first ran of 1942 and then later that year it first started flying and that was basically the first time there was an American jet engine.

And then on the other hand you have GE and TransDigm and Heico and and other similar businesses that all operate you know phenomenal and and really highly profitable businesses tangential to the aviation space sort of from a different perspective.

And both of those thanks are suddenly given now for GE, but the business was not always steady. So, it was pretty tough in the beginning, actually. So, GE wasn't as dominant as it is today back in, for example, the 1940s, when demand for the engines after the type one supercharger was so massive that GE didn't actually have the capacity to build them all.

And that's also part of the mode that GE nowadays has, where you have the scale and then it's just incredibly difficult for anybody else to compete with you. And then GE eventually won the business back in the '50s, so it didn't take them a long time when a new generation of military engines called J47 and J79 dropped.

And the J79 was a so-called Mach 2 engine. So, it's powered the I think it was the F-4 Phantom and the F-104.

And then he ran GE's aviation business from 19 61 to 1978. And GE's headquarters in Cincinnati actually called First Neumann Way. So, he left quite a mark in in what he did there.

But beyond the military operations, the commercial business started with the CF6 in the early 1970s, which went on the DC-10, which is a plane that I have never heard of and I don't know if it's still in production, but it also went on the Boeing 747 and the Airbus A300 and And also later on the Boeing 767, and those are pretty pretty popular planes by now.

And then came what you could probably call the most important decision in the company's history, which is the joint venture between the French company Snecma and GE. The new company was called CFM International and was basically a 50/50 venture between GE and the company Snecma, which by the way is now called Safran, but I feel like all the names are kind of confusing all the time.

So, GE builds the core of the engine, which is what they do in best. So, you have the high pressure compressor, you have the combustor, and you have the high pressure turbine. Those are basically parts of the engine which are the hottest and also the most technically demanding parts.

And the reason this joint venture exists in the first place is, once again, we go back to war, the Cold War that we had between the US and the Soviet Union.

And the GE engines were used in the B-1 bomber back then, and engines were seen as so vital to the success of the military that it was almost always a political question of who you sold them to.

So, in 1972, for example, the US State Department refused the export license for those engines. And I think it was Henry Kissinger personally who signed the refusal for all of those engines.

But then only a year later, at a summit in Reykjavik, the French President Pompidou and US President Nixon made a deal that GE was actually allowed to ship the engine cores to France, but only as a sealed unit built in the US.

And then France would pay, I think it was about $18 million as a royalty to the US government.

the engine actually turned out to be a major flop at least in the beginning anyways. For 5 years, there were no orders and then in the spring of 1979, French government threatened to stop funding it and GE and Snecma were reportedly 2 weeks away from freezing the whole program.

And so only then did United Airlines order it to re-engine some parts of their old fleet and you know, the US Air Force followed then closely after that and chose it for some of their tanker series planes and then in 1981, Boeing made it the exclusive engine for the 737-300 and that was the first major breakthrough the engine needed.

So it went from 2 weeks away from cancellation to being the best-selling commercial jet engine in history. So that's one of those random breaks of fortune that is seems almost lucky and totally improbabilistic.

Most people that nowadays think of GE think of this company that's incredibly stable cash printing machine, but at the right time you also need luck with the timing, right? You have this engine, it's very powerful, but if all the engines right now on the airplanes work quite well, there's nobody who demands new engine, you can actually sit on a very good product and you can't sell it, which you know, in this case fortunately worked out.

And what's also interesting is why we only talk about GE as an aerospace company when most people, actually me included, think about a massive conglomerate whenever GE comes up.

He basically ran GE from 1981 to 2001, so two decades, and took the market value from about $12 billion to over $400 billion, and made GE back then one of the biggest companies in the world.

And he was called Neutron Jack because he cut the workforce from 411,000 people to only 299,000 people in his first 5 years at the job.

And then he also built GE Capital into a giant financial business. So he basically expanded this conglomerate and grew it into a way, way bigger company.

under him, GE Capital grew to more than half of the company's profits by 2007. So although you had this conglomerate, it was pretty concentrated in where the profits actually came from.

And GE Capital provided commercial lending, consumer financing, and also asset leasing to the customers who bought these heavy GE equipment products. So for example, the engines.

And that turned out to be a massive problem because maybe you followed the timeline here, it's 2007. So just 1 year later, the financial crisis came and killed almost the entire business because you were sitting on so many financial contracts and lending.

And then no other than Warren Buffett stepped in and put $3 billion into GE preferred stock in October 2008 at a 10% coupon.

Even that didn't really help, though. Immelt made some pretty massive mistakes during his tenure, I think it's fair to say. And it might be really one of the best case studies for how not to run a business.

I remember reading case studies on Jack Welch and it was always framed as how to run a business and then there's been some controversy that's come out in hindsight about maybe managing earnings during his his tenure, but it certainly didn't seem like he made sort of the catastrophic mistakes that Immelt did.

And so for example, Immelt bought Alstom's power business for about $10 billion back in 2015 and that was right before the market for gas turbines collapsed. And then he also spent $93 billion on buybacks during his tenure and most of that was at a price above $30 per share.

Well, for context, stock ended up being below $7 eventually.

And so in 2018 things got so bad that GE was removed from the Dow Jones after having been a member for over 100 years going back to 1907.

So I just I remember all of this actually pretty well because I actually bought GE stock back in 2014 as one of my first investments ever and I figured they'd eventually get things sorted out since they were such a blue chip name for many years, but that was really as much logic as I had to put into the thesis as a teenager at the time.

And yeah, I'm certain that I lost money on that investment.

ultimately results matter and Immelt certainly didn't deliver for large parts of his tenure. And then at that point the famous activist investor Nelson Peltz became quite involved.

He built a $2.5 billion position for his own Trian in 2017

Peltz said, "Quote, I was sure GE was going to file for Chapter 11. Then Larry arrived and performed the most amazing rescue I've ever read about or borne witness to."

He also said that Larry Culp is the greatest industrial CEO on the planet. GE not only delivered us a master class basically on what a CEO shouldn't do, but also one of the greatest CEOs of all time and basically how you can perform a turnaround, which, as we all know, by Peter Lynch, doesn't work out too often.

And Larry Culp has also been the first outsider CEO at GE in more than 125 years. And apparently, he was offered the job before, three times actually, before he finally accepted it.

And on his first day, GE's market value was about $96 billion. And then four weeks later, he did the first measure, so he cut the dividend to 1 cent a quarter and wrote down $22 billion dollars in the power business.

But, by far the most important decision of what we are known for has been that he split up the company into three parts in 2021. So, you had the big conglomerate now going into a GE Healthcare spin-off, a GE Energy spin-off, which was the company GE Vernova, and then what was left was the aviation business with the original GE ticker that was basically turned into GE Aerospace, the company that we are discussing today.

And when we look at the history of maybe best CEO decisions ever, this actually might very well be up there. And so, as you mentioned on Culp's first day, General Electric was worth 96 billion dollars.

And so, the three companies that he would then split it into are now collectively worth over 600 billion dollars today, and that is already accounting for GE Aerospace having dropped 20% from its high this summer.

So, that's more than six times your money in eight years with a blue-chip company, right? With a you know, this is not a small-cap name. Uh so, that's roughly 26% a year compounding.

And so, the S&P 500 for context did about 13% a year over that same stretch, which is actually a really great rate of return for the index, but GE pretty comfortably doubled it.

And GE Aerospace specifically has more than doubled since the energy business was spun off in April 2024 alone. So, a little more than two years ago.

I do think it'd be interesting to to better understand where in the value stack GE operates and fits in and how that compares to Heico and TransDigm in particular.

At the risk of spoiling, I would say it's an even better business than the two of them. So, Heico and TransDigm. And it basically feels like the higher up the value chain you go, the better the economics actually become.

And airlines have the worst economics, then you have these OEMs like Boeing and Airbus. And despite having a duopoly, which should give you some kind of market and pricing power, they haven't actually been able to produce great margins over time.

And their highly capital intensive business models have made them mediocre investments.

Of course, GE is also capital intensive and working in an oligopoly, but their economics have still worked out quite differently. So, GE primarily has the advantage of benefiting from the aftermarket, just like Heico and TransDigm do.

So, that is the most profitable market in the aerospace industry.

Just like the two of them, GE basically sells its products, so in their case the engines, at a loss initially, and then makes its money when there are repairs or when they have to go in for service.

do you see GE as being a monopoly or are there competitors out there that can hang with them that are of a a meaningful size? It is an interesting dynamic because there are three big engine makers.

You have GE, you have Pratt & Whitney, which belongs to RTX or Raytheon as it used to be known, and then you have Rolls-Royce.

but GE is by far the biggest of them all by a wide margin. I think they control about 40% of the global engine maintenance, repair, and then the overhaul market.

So, you could probably say that it is technically an oligopoly, but because of how contracts are structured, which we will still talk about, I don't have a problem with calling GE maybe also a monopoly looking at, you know, their market position.

The reason for why there is so little competition in general is that the barriers to entry are just enormously high. So, a new jet engine takes roughly a decade and several billion dollars to develop before the first one is ever delivered

which is why we got to, you know, we talked about it in the history section, a lot of these engines were huge strains on the balance sheet, and then you didn't even know if, at the time of finishing them, there will be enough demand and also space on the planes to actually get them into the market.

So, you basically have a program that loses money for years, and then after the engine is sold, you're still sitting at a loss for many years after. GE's engine, for example, has done more than 30,000 test cycles, and it's still losing money for them.

And GE says the loss will actually double this year, and then peak around 2028, so in 2 years time.

And the LEAP engine, which is the newest one, is on the 737 Max and on the A320 Neo. They entered service in 2016, and then they only broke even as a program last year. So, we're talking 9 years of losses, and that's 9 years of losses that basically the balance sheet has to absorb, and you as a company have to still spend on R&D and all that.

And once an engine is certified for an aircraft type, basically it's locked in. So, competitors can't really come into that market easily. And that's the same logic that applies to why a lot of investors really like TransDigm and Heico.

And although I would say the consequences are a little more severe when we talk about GE's products failing than when we talk about TransDigm or Heico's.

when you have to spend more than, you know, 100 years in this business, one of the other big advantages, and GE has done that, is that you build over time a huge installed base.

So, that is very hard to disrupt because the contracts are just going for such a long time.

And for GE, for example, we're talking about 50,000 commercial engines and 30K military engines in service around the world. So, those are basically locked in customers for decades to come.

And then, even to sell an engine to an airline, you also need a global network of repair shops. You have to have the spare parts, you have to have spare engines and technicians.

And then also the airline usually wants pilots and mechanics who already know your engine, right? Who, for example, when they, you know, started flying, they used your engine for those lessons.

And then last but not least, airlines are just incredibly difficult to build. So, you probably it's not an over exaggeration if you say that they are sort of marvels of the modern day.

I mean, a modern turbine blade is a single crystal of nickel superalloy that operates at temperatures above the melting point of the metal is made from. So, it's basically cooled by air channels inside the blade and that has to be enough so that it's not melting.

And then every generation of engine tends to be more efficient and more resilient. It's just incredibly difficult to build that. So, you also need a lot of talent.

as soon as any original equipment manufacturer OEM chooses a GE engine for their new fleet, they're basically signing what is a multi-decade commitment as I understand it.

And that is also why they can offer their engines at a discount to the list price to win over business when they first sell them because really they're selling at a discount to lock in many, many years of services and repairs that are going to be sold at a much higher margin over time.

this is sort of what happens with these engines as well where they typically fly for about 25 to 30 years. So, that's the time when GE actually makes money and margins on them cuz during that time it has to come into the shop for major overhaul roughly three times during its usual life.

So, each of those shop visits can cost a millions of dollars mostly in spare parts that only GE can make.

And then GE's own math is that every engine they put on a plane brings back about three and a half times the original revenue in services over its life. So, that's how they actually make the money.

And in GE's commercial engine segment, services are more than 70% of revenue. And although GE doesn't break out profit by services and equipment, basically everything in the numbers tells you that services are the vast majority of the profit.

So, the segment as a whole has a 27% margin and it does that while basically selling all these new engines at roughly break even. And that's kind of similar to TransAm's numbers because 1/3 of TransAm's revenue is after market, but it's 75% of EBITDA.

And GE's returns on invested capital are also outstanding at close to 40% in recent years, which is kind of remarkable for any manufacturing business and actually any business for that matter.

And just to give listeners an idea of the size of the business, GE generated a little more than $40 in revenue last year. It looks like GE has about a 20% overall margin and so I do ask myself whether all of the aftermarket actually goes to GE or whether companies like TransDigm and Heico went over some of the aftermarket revenue with their parts businesses.

So the default is to go with parts from the engine maker, which in most cases is GE. And this basically is similar asymmetry to the one that we discussed with the TransDigm where if anything should happen to the engine or even worse, let's say the plane mid-air, and you were the one deciding to go with an unoriginal part, you would be in big trouble.

So for a long time, you even had the problem that GE waved the warranty once you as an airline or even as an OEM used a non-original part for the repair. But that changed some years ago since airlines actually came out and complained about you know the market power that this policy has given to GE.

Perhaps over time they are allowed and able to build those tools and then you would certainly talk about them as a competitor to GE.

CFM delivered 1,800 LEAPs last year, up 28% and more than 1,000 in the first half of this year, which is up 40%.

And the reason for the relatively low contribution to profit is that GE's defense margin is only about half and even a little less of the commercial margin.

So, on the planes that matter most, GE has roughly three quarters of the market, which is also what I told you before then. You could potentially talk about them as a monopoly because if you own three quarters of the market and you have those contracts for, let's say, 30 years, that's a lot of market power.

Within that family though, there are two more generations of the GE engine. So, you have the old generation, which is the one that GE has been selling since the 1980s, and there are somewhere between 19 to 28,000 of those.

You would think that you get a more precise number, but it kind of depends on who you trust. GE says it's 19,000 and then Safran says it's 28,000, so there's quite a delta there, but somewhere in that range we are.

And that's the largest number of any engine ever built and it's sort of the cash cow because those engines are old, they need a lot of maintenance, and every part actually comes from GE.

And then you have the new generation, which is the LEAP that we have mentioned now quite a bunch of times and it's been in service since 2016 and more than 10,000 of those have been delivered.

And, you know, it's sort of the growth engine, quite literally.

So, GE honestly knows what it will be building probably well into the early 2030s.

Although you might argue that it's, you know, lost and least because again, the defense margin is only 12%, which is about half the commercial business. And basically, why is that?

So, the government buys on what they call cost-plus contracts with profit caps. So, there's no catalog for spare parts where GE can actually raise prices every single year, which is kind of what we've seen TransDigm.

And therefore, a lot of the development is actually paid for by the government. So, it's a pretty stable, decent business, but it's not a fantastic one.

And another reason is that a good chunk of the R&D that goes into GE's engines, actually about half, is financed by the government and that's a lot of money. So GE's total R&D is about 8% of all aerospace revenue and half of that is government funded.

So basically to make sure that GE will keep having the most up-to-date and the most innovative military engines to you know, have the US with the strongest planes in the air. And then in return, it acquires data rights and licensing rights, which is why a lot of the services then run through their own depots.

So GE's military aftermarket is basically a negotiated spares and support business, often structured as performance-based logistic contract. So it's not a catalog business where GE controls the shop visit and that's also why the services are only 50% of the defense revenue versus more than 70% of commercial revenue or business.

And that's also why defense spare parts earn significantly lower margins than commercial part.

So, when we go back to GE and look at their military and government business being lower margin, the thing that deserves mention is that it is highly protected. And there is really almost no world imaginable in which GE would lose that business or generate a margin below at least a low double-digit margin.

And so, in my opinion, that does actually warrant a higher multiple and might even be worth even more overall than the commercial side of things.

And another factor of stability and predictability for GE is the massive backlog. So, the revenue that's already under contract but not yet realized is about $210 billion and of that, almost $180 billion is services.

So, that's the spare parts and maintenance, the high margin part of the business. That's more than 4 years of the company's total revenue and about 85% of it is the high margin part.

The problem for GE right now is that they actually don't even have enough spare parts for the demand that they are seeing in terms of servicing. So, for one, that's because the global fleet of airplanes right now is quite old still due to COVID halting the order of new airplanes for a while and then also because Boeing and Airbus are currently running slightly behind on their internal schedules to build new ones and that's basically creating this, you know, traffic of where it kind of stops and nobody is building enough airplanes and then GE doesn't have enough of the spare parts.

>> So, that's a a real headache on the supply side. But, on the demand side, an older fleet is definitely a good thing for GE, right? Engines have parts with hard limits enforced by regulators on when they need to be serviced and replaced and performance naturally sort of degrades with age.

So, older engines come off the wing more often for repairs and each shop visit tends to be more

And so, when we look at the LEAP engine we talked about earlier, it's just now reaching its first wave of shop visits. And so, GE guides LEAP shop visits to grow about 25% a year through 2030, and the more expensive second visits arrive in around 2028 or 2029.

And that's cuz demand for spare parts is so far ahead of what GE can produce that the parts GE owes customers and hasn't yet shipped yet went up 20% in the second quarter alone.

An airline can basically pay GE in two ways. So, the first one is the obvious one where GE gets paid for the parts and for the labor directly, but the other way is through a long-term service agreement, which the industry calls rate or revenue per flight hour.

So, the airline basically pays a fixed amount of money for every hour the engine flies, and then in return, GE takes care of everything. So, it's sort of like an insurance policy that they can buy directly from GE.

And about 40% of GE's service revenue is structured in exactly that way, and total expected billings over their lifetime are close to $175 billion.

But I got to say that when I first looked at this, the accounting seemed a bit weird, or at least it took me a minute to understand it. So, GE basically books revenue on these contracts based on the cost that it expects over the whole contract.

So, if those estimates change, there's obviously a catch-up adjustment that GE has to make, and this usually is a rounding error, but should an engine turn out to be more expensive to maintain than GE assumed, and we talked about quite a margin, well, then the profit gets revised down by quite a margin, too.

And GE only gives you this number because, you know, when they book a billion dollars in costs, they don't want you to lose perspective, because $1 billion can like a lot, but if you then compare it to the $170 billion of contracts, that's a very small amount of money.

So, it's important to understand, and this is where I sort of tripped in the first moment, is this is not a sort of second backlog. This number is already part of the backlog. So, if you look at the $210 billion of GE's backlog, 170 or 180 billion of that is the service part, and then a large chunk of that is basically this insurance-like policy.

So, if this was too complex, you can just remember the backlog is 210 billion, and 170 to 180 billion of that is the high-margin service business.

Well, to maybe try and put it in my own words, with a flight hour contract, the airline is, as you said, basically buying an insurance policy from GE, and they're paying a set rate for every hour the engine flies, and then GE is covering whatever maintenance comes up during that period of time.

And the GE books the revenue based on what it expects the whole contract to cost. And so, if an engine turns out to need more work than GE planned for, then GE will eat the cost, and the profit it expects to book will get revised down.

And so, the risk of an engine being expensive to maintain actually sits with GE, not the airline.

And that works great as long as GE's estimates for how well and for how long its engines will hold up are pretty accurate. That's exactly how it works. And it's actually quite of a problem with the LEAP engine right now, because it's known to be more efficient than burn about 15% less fuel than its predecessor.

However, it does that but basically running hotter, which means that the downside of that is that parts wear out faster, especially in places that are hot and dusty anyway. So, you know, imagine Middle East or maybe India, and instead of going through the first engine overhaul after 5 years, in those regions, some of the engines needed their first overhaul after only a year and a half.

Wow. It It it like that would be a good thing for GE, but actually GE is the one paying for this given the dynamic that we just described. So, it does align well with customers because GE is obviously incentivized to build very capable and sustainable engines, but then that can also be an expensive burden for them.

And so, that's why the maintenance business on the new engines lost money for years and only broke even in 2024. And you can't see that in the margins, but you told me that would be because the profits on the old engines were so large that they basically covered it.

Well, we did introduce the CEO Larry Culp before, right? And then again, he's somewhat of a genius for what he did to GE. He spent basically his whole career before GE at Danaher.

So, he joined the company in 1990, became its CEO about 11 years later in 2001. Then he stayed until 2014. And under him, Danaher's revenue and market value both went up fivefold.

So, he came with quite a lot of success from his, you know, previous job.

So, you know, jokes aside, one controversial thing about Culp because not everything was great was his compensation. So, his 2018 contract was worth up to $300 million if the stock would go up about 150% and then in August of 2020 in the middle of COVID the board extended his contract and it reset the targets lower because again it was COVID not best time for GE and all of the airlines and in May 2021 almost 60% of shareholders voted against his pay which at that scale of the company rarely happens I would say and GE actually cut his equity award the year after and canceled about $20 million of awards that were targets but he missed them so his 2024 pay was still quite high we're talking about $88 million including a one-time $49 million grant

but I don't know I would always say that if you have a CEO who you know does a fantastic job and might quadruple or fivefold the stock over let's say five or 10 years time I'm okay with him being paid though well for that we've seen that with other CEOs if the alignment is not that great and they don't have any skin in the game they get paid money without actually doing a lot for shareholders I think that's different but that was certainly not the case here

so one thing that I actually do criticize a bit is the capital allocation in the last few years GE spent pretty much all of its free cash flow on share buybacks which by the way is also what Immelt did back when he was the CEO and he spent you know 93 billion bucks while the stock was valued at quite high valuations and this is sort of the same problem here so while you and I like share cannibals the problem is that GE is trading at price to free cash flow 40 times which means they put a lot of billions into buying back stock at hefty valuations and when you spend all your cash flows which is about 8 billion dollars a year and then the buyback yield that you as a shareholder get is only 2. 5% I don't feel too good about that.

All right what I would give them credit for is that they only started the buybacks when they had already drastically reduced long-term debt and so GE used to be actually a highly indebted company with more than a hundred billion dollars in long-term debt just sitting on the balance sheet and that was about a decade ago and by now that debt is down to a much more manageable 17 billion dollars with the company's massive cash flows that should be not too problematic for them.

And so in order to repay that pile of debt that they had incurred, GE basically massively dialed down the dividend so they could instead spend that money on repaying debt instead of paying that out to shareholders.

And so that actually seems like a very good capital allocation decision in terms of maximizing the value of the business over the longer term and taking out some of the the baked in risk.

That's true though. And all of this also happened on the cusp. So technically you could also, you know, account for that in the capital allocation grade that you would give on it.

They basically paid on about $80 in a matter of just 5 years time. So part of the truth is that the cash balance has also come down while they were paying down the debt significantly.

But you know, compared to the debt, it still looks very healthy. And as you said, they have like 8 9 billion dollars of cash for the year. So 17 billion of debt is certainly very manageable.

And I think that's a problem that you will never run into with GE because again, they spent a lot of money on bringing down the debt. And now they sort of have the luxury of being able to spend money on buybacks.

They also still spend money on acquisitions whenever it makes sense.

So for example, just a couple of weeks ago, GE acquired Consolidated Precision Products, in short CCP, which is a castings maker. And castings are these metal components that turbine blades and structural parts of the engines are made from.

And they paid about $12. I think it was 11.75 billion. And about 7 billion of that was paid in cash. And then you also have a bit of new debt coming on the balance sheet and that's supposed to close in the second half of 2027.

The price was quite high, so they paid about 26 time of CPP's expected 2027 EBITDA.

Yes, that's certainly how I would think about it. So, CPP already supplies about a quarter of GE's airfoils. So, you know, the blades and the veins inside the engine. So, this is a supplier that GE knows well and then about 60% of CPP's $2 billion of revenue comes from the commercial engines and then the rest is from defense and some power generation customers.

So, it's a company that GE knows quite well and they could certainly use more of that manufacturing process in-house so they don't have the same supply problems.

And the way that GE justifies paying this again, rather hefty multiple is that they can control supply much better with CPP in-house. And they're also saying there could be about $200 million in costs and productivity synergies.

I feel like synergies is, you know, somewhat of a bad word in value investor circles, but I can see how it makes sense in this case. It definitely makes sense, I think, to take a supplier in-house that is critical for your supply and I can totally see how they can make it more efficient in in the process of doing so.

So, I guess $200 million isn't too much money for GE anyways, so it is nice if those synergies come to fruition. And and if not, you still have maybe a smart but although not cheap strategic acquisition.

how do you think about the risks with GE for investors? I mean, the market is willing to pay 40 times multiple on cash flows. So, it doesn't seem like there's too much on the horizon that markets are immediately worried about.

Well, I mean, GE has a business with lots of physical assets, obviously. So, that means there's also lots of operating leverage. And as we all know, that can work in different directions.

So, for example, in 2020, GE Aviation's revenue fell 33% and then profits fell by 82% in just a single year. And then it took until 2024 to get back to 2019 levels.

So, the services are more resilient than new engines, but when airlines are in trouble, they even defer shop visits and run engines on what's called green time. So, that means they operate an older engine with some flight hours left on critical parts before it hits the regulatory limit.

So, you always have the risk that there's some macro shock happening and people fly less and then you could quickly see those profits that GE is currently earning tumble down.

And beyond that, if you compare to, let's say, TransDigm, GE is certainly more concentrated. So, you know, TransDigm is known for having hundreds of small monopolies. GE's mode is essentially one enormous product line.

And while GE can certainly lock in decades of demand when it is accepted for a new airline, with each new generation, it also has to fight for that spot again, right? That's what we talked about earlier.

You have an engine that is just not in demand for one new generation of airlines, they might switch to one of the competitors and then you lose revenue for the next 20 or 30 years. So, that's a huge one.

So, the more GE uses its pricing power in the after market, the more pressure that is for airlines and the more they will push for regulation, which is then allowing them to use cheaper parts instead of the original ones from GE or, you know, TransDigm.

So, as you mentioned, there there is a push in that direction already, right? That's what it sounds like. And so, GE can no longer wave the warranty when airlines use cheaper, but certified, parts.

And so, the EU also forced Pratt & Whitney Canada, the GE competitor, to drop contract terms that block used parts. So, things are are slowly changing and it kind of reminds me of how Apple uses its monopoly power to say, you know, if anybody else has ever worked on repairing your phone, all of a sudden it's out of warranty and there's nothing we can do for you, right?

And and that's uh sort of a the similar game that they play.

And so when we go back to GE, they're very differentiated in the complexity of the parts that they sell. And that gives them some resistance to competition where you don't have Haier coming in and and just selling one-for-one the same pieces that GE really relies on to drive their business.

On the revenue side, I have the services business, so that's, you know, the spare parts and the shop visits, going 21% this year, which is basically in line with guidance. And then it's actually slowing down to about 9 to 10% year through 2030, so the end of the decade.

And then new engines grow 20% this year, and then the cycle slows down and it will go to about 7% after that. And that's mostly dependent on how fast Boeing and Airbus can build planes so that you have new engines going onto those planes.

And I'll have the defense segment go about 10% this year, and then half of that for the remainder of the decade. And that gets you to about $70 billion of revenue in 2030, and overall you have a compound rate of about 10% off the top line.

And then in terms of margins, I do see them go up. So, for example, for commercial margins, they go from 26% to 29% in 2030. And part of that is that, you know, we talked about the margin drag that the LEAP engine, because of the service contract had before, if we assume that normalizes, you should see margins continuing to go up from this level.

And, you know, that's basically happening in about 2028. That's the guidance that we've currently been given by the management team.

And then defense might also see some slight improvements on the margins, but again, GE is sort of limited in how much margin they can actually earn on their business. And then, thanks to GE's buybacks, which I'm not a huge fan of, but they're still adding to your return, you have the share count shrinking by 1% to 2% a year.

And the dividend will also likely keep increasing. And, you know, that might be by a growth rate of, for example, the mid-teens. And then if you put that together, I could definitely see earnings per share of at about 16% a year for the next four to five years.

So, that's why I say, well, if you go into the model and then you just put a different multiple on the assumptions, 20 times, 30 times, 40 times, you will find that only if you stay in the 35 to 40 times earnings range, you will still be able to get a good return on GE Aerospace.

And obviously GE is a vastly different business, but at a super high level, the earnings could very well be even more durable than Hermes's because there's a degree of contractual and regulatory guarantees that are sort of inevitable.

And also there's no risk of the end user changing their preferences in the same way in this industry, right?

And so when you see, though, that companies like Ferrari or Hermes have traded at multiples well above 30, even 40 times earnings on average, I don't think it's just completely unreasonable at all to think that a business that's as well insulated and competitively as advantage as GE would warrant something like a 30 times exit multiple or more.

But even at your 30x multiple, the return that for example in my model would be suggested, it's still in the high single digits if even. Just because you're currently trading at 40 times, and you only expect about 10% earnings growth going forward, right? So it's definitely on the more expensive side.

And I would be surprised that, you know, for example, Chris own over time if this keeps being a third of his portfolio, wouldn't sell some stock if we are these valuations. So it's certainly stock that I would like to buy if it's a bit cheaper.

it's a cyclical business. If you just look at the stock chart for example, it's going up and down quite a lot. So it's not like this straight line to, you know, up and to the right as many of the components, especially in the software business, look like for a long time.

So I do believe there will be an opportunity to buy this stock at, you know, a cheaper price at some point.

I think that will be a trend that over the next 20, 30 years time will be a massive tailwind.

So, that's a beautiful tailwind to have. And then, still, as you said, I think of, you know, the company's trading at these multiples, for me personally, that's a bit too high.

So, currently, I would say high up on the watch list, it's not a position in our portfolio yet.

All right, if you don't have anything to to counter with that one, I would say I'll close it for today with a quote by the GE legend, Jack Welch, and he said, "Quote, good business leaders create a vision, articulate that vision, and then personally own the vision, and relentlessly drive it to completion."

So, I think he definitely did that with GE. Actually, they had a couple of CEOs who were able to do that, and I guess it's fair to say that those leaders are part of why GE is currently trading at 40 times earnings.

And again, it's an outlier. At some point, we might like to own it.