Why Jim Cramer thinks GE Aerospace, GE Vernova have more room to run

Key Concepts

• GE Aerospace: Manufacturer of jet engines and airplane components, with a significant maintenance and repair business.
• GE Renova: GE's power business, focusing on turbines and electrification equipment.
• Organic Revenue Growth: Revenue growth excluding the impact of acquisitions and divestitures.
• Commercial Engines and Services: GE Aerospace's largest segment, encompassing engine sales and after-sales support.
• Shop Visit Revenue: Revenue generated from servicing and repairing jet engines.
• Supply Chain Improvements: Enhancements in the reliability and efficiency of sourcing critical components.
• LEAP Deliveries: Shipments of GE Aerospace's LEAP family of turbofan jet engines.
• Narrowbody Engine: A type of jet engine typically used in smaller, single-aisle aircraft.
• Installed Base: The total number of engines already in operation, which drives future service revenue.
• GE Renova's Backlog: The total value of orders for future delivery, indicating future revenue potential.
• Electrification: The process of converting energy systems to use electricity, a key growth area for GE Renova.
• Prologis: A joint venture GE is fully acquiring, specializing in equipment for the electric grid.
• Power Transformers: Essential components for the electric grid and data centers.
• Serviceable Addressable Market (SAM): The portion of the total market that a company can realistically reach.
• Small Modular Nuclear Reactors (SMRs): Compact, factory-built nuclear reactors.
• Stock Buybacks: A company repurchasing its own shares, often signaling confidence in its valuation.

GE Aerospace: Strong Performance and Market Misinterpretation

GE Aerospace, a significant player in the aerospace industry, has demonstrated exceptional performance, with its stock up over 80% year-to-date. The company reported a "terrific quarter" with a 26% organic revenue growth, exceeding expectations on both the top and bottom lines. This growth was primarily fueled by strong results in its commercial engines and services divisions, as well as its defense and propulsion technologies business.

Key Financials and Growth Drivers:

• Commercial Engines and Services: This segment, the largest for GE Aerospace, saw impressive growth.
  • Equipment Revenue: Increased by 22%.
  • Services Revenue: Grew by 28%, significantly boosted by a 33% increase in internal shop visit revenue.
• Profitability: The high-margin services business, particularly engine maintenance and repair, is a key profit driver. The Commercial Engines and Services division grew earnings by 35%.
• Full-Year Forecast: Management raised its full-year forecast for commercial engines and services revenue growth to the low 20s, an upward revision from the previous guidance of high teens.

Supply Chain Improvements and LEAP Engine Deliveries:

A critical factor contributing to GE Aerospace's success is the improvement in its supply chain. The company reported that its priority suppliers, those deemed mission-critical, are now meeting shipment targets for over 95% of volumes, a significant improvement from the previous year. This enhanced supply chain reliability has enabled:

• Record LEAP Deliveries: The company achieved record deliveries of its LEAP family of turbofan jet engines, up 40% year-over-year.
• LEAP Engine Outlook: GE Aerospace anticipates the LEAP engine to become the industry's most utilized narrowbody engine, eventually surpassing the CFM56.
• Increased Delivery Forecast: The company now expects to increase LEAP engine deliveries by over 20% for the year, a notable increase from the previous forecast of 15-20%.

Market Reaction and Valuation:

Despite the strong financial results, GE Aerospace's stock experienced a volatile reaction. It initially rallied, then sold off significantly before rebounding. The speaker suggests that the decline was due to some concerns about "implicit guidance for the fourth quarter," which they attribute to management being conservative. The speaker argues that the company's performance, under CEO Larry Culp, is "amazingly impressive" and potentially the "best industrial report this year." The current stock price, even with the rally, is only slightly higher than pre-earnings levels, suggesting the market may be "getting this terrific quarter for free."

GE Renova: Powering the Future and Data Centers

GE Renova, GE's power business, also reported an "excellent top and bottom line beat" with "spectacular organic revenue growth." A key highlight was the 15% year-over-year growth in its backlog, reaching over $135 billion. The company secured nearly $15 billion in new orders, providing a direct indicator of current demand.

Market Reaction and Data Center Connection:

Similar to GE Aerospace, GE Renova's stock initially plunged after its earnings report before rebounding. The speaker attributes this initial sell-off to the stock having already "run up dramatically" in anticipation of strong results, and its connection to the "data center economy." The demand for electricity to power data centers is a significant driver for GE Renova's products.

Strategic Acquisition and Electrification Growth:

A pivotal development for GE Renova is its $5.3 billion purchase of the remaining 50% of Prologis, a joint venture with a Mexican company that manufactures equipment for the electric grid. CEO Scott Red 6 views this acquisition as a way to "bulk up the company's exposure to their fastest growing segment of their power business, which is electrification."

• Prologis's Role: Prologis's primary product offering includes power transformers, which are crucial for both the electric grid and energy-intensive applications like data centers.
• Market Expansion: GE expects its combined serviceable addressable market (SAM) in electrification to expand at a 10% compound annual growth rate, potentially doubling in size by 2030. This growth is driven by the need to modernize and expand the existing grid infrastructure.

Nuclear Power and Stock Buybacks:

GE Renova is also positioned to benefit from the growing interest in nuclear power, as the company builds nuclear plants. While acknowledging the long lead times for new nuclear power plants, the speaker anticipates increased discussion around small modular nuclear reactors (SMRs) in the next two years, making GE Renova a "safe way to play the theme."

Furthermore, the company has repurchased $2.2 billion worth of its own stock year-to-date and intends to continue opportunistic buybacks, believing there is "incremental value embedded in our stock."

Conclusion: Market Mispricing and Future Potential

The speaker concludes that the market initially "got them both wrong" when GE Aerospace and GE Renova reported their earnings. However, the subsequent rallies suggest that the market is now recognizing the strong performance and future potential of both companies. The speaker is "betting that GE Aerospace and Renova are ready to run, and that today's rallies were the ones that mattered." The companies are seen as poised to benefit from global trade dynamics, particularly the need for large ticket items like aircraft and turbines, and from the burgeoning demand in the data center and electrification sectors.