GE Aerospace: $200B Backlog, Growing Travel and an Earnings Options Trade

Sam (0:00)

We're back on Morning Trade Live, and looking at the one year chart for GE Aerospace, shares are down nearly 20% since hitting an all time high on August the 6th. Still up though, 4% year over year. So let's go inside out on GE Aerospace and preview tomorrow's earnings report. Joining us now is Tony Bancroft, Portfolio Manager of the GCAD, ETF, Gabelli Funds. Tony, thank you so much for your time. What are you looking for into the print tomorrow?

Tony Bancroft (0:24)

Yeah, great to be back. I think we're going to see likely continued growth, probably moderate just because of all the volatility going on in the Middle East, but commercial air travel, RPKs are still growing actually and actually growing fine, given oil being up what, almost 80% year to day, the price of oil being up that much. And people are still traveling, ex-Middle East, it's up about 2%. So I think shop visits, you're going to hear about probably continued growth on shop visits.

Obviously, flight hours and services side for commercial aerospace, which is GE's biggest driver, of course. And then on the defense side too, seeing probably anything to do, incrementally positive with defense budgets. Obviously, GE is a huge engine supplier to the US and allied militaries. So I think there's a lot of spot going on right now, but in the long term, probably those two metrics are going to continue to grow. Commercial travel is not driven on oil prices. It's very clear that commercial travel has been growing at 4 to 5% annually since 1980 And there's been high volatility in oil.

And I think the Middle East and what's going on in Hormuz at some point will settle down. And this two shall pass. And you're going to see probably continued growth in commercial travel.

Sam (2:10)

OK, and we did see obviously it comfortably beat estimates last time around. Obviously, it raised its full year 2026 guidance. And also free cash flow is holding up as well around what $9 billion. I'm wondering how important those metrics are as far as keeping up the momentum.

Tony Bancroft (2:27)

Yeah, listen, GE is a huge cash flow driver. They've got a great business. They essentially, they're the largest engine supplier in the world. And they have the servicing business for that, which drives, generates a lot of revenue for them. And it's extremely profitable on their parts business.

That's going to continue no matter what. All things being equal. I mean, I'm sure that's how much above or below expectations that will be, of course, will drive the stock. But again, over the long term, it's a long term holding in our commercial aerospace and defense, ETF ticker, GCAD, and it's done very well. And we continue to see that being the case.

Sam (3:10)

What about this order backlog? I mean, obviously sitting at over $200 billion. How much of that would you like to see obviously translating into revenues?

Tony Bancroft (3:20)

Yeah, that's a huge component of GE. And most of that, of course, the lion's share of that is the services business. They've got $170 billion services backlog. And that's going to continue.

But planes fly, which they are continuing to do. They need to be serviced. Engine, jet engines need to go into the shop and get, you know, obviously get repaired and inspected and maintained. And that's going to be a big component of that growth. And then on the actual jet, you know, the jet engine sales side, again, there's a huge backlog for aircraft and jet engines as well. And they are the, you know, they're sort of the long pole in the tent is getting these motors out the door. So they've got a great business and, you know, the leap engine has just been a huge success for them. It's done extremely well.

And, you know, that's likely going to continue.

Sam (4:15)

Just very quickly, obviously, on the global investment side, we've just had a couple of days ago an MOU with Turkish Airlines for the leap engines, as you mentioned. But we've also had this company looking acquisitive as well with the castings manufacturer too. I mean, how much would you like to hear certainly on some of the aggressive, it seems, spending capacity and expansions that we've seen?

Tony Bancroft (4:42)

Yeah, I mean, I think they felt obligated to be acquisitive.

Obviously, the parts that they need are the things that they're buying, and they got to get these engines out the door and get the supply chain in order. And it's just going to take time and you'll probably, I mean, all things being equal, you'll probably see continued acquisitions in this space. It's obviously the, it is the driver that's essentially, what's driving the supply chain right now is engine components and forging, casting. You've heard of everything. And I think it's probably going to be, there'll probably be some more acquisitions here in the coming years in this space. It's a hard thing to do. We've visited a bunch of aerospace and defense companies and doing these, making these engine blades and making these castings and forging is hard to do. Not many people can do it. And it's definitely a bottleneck that needs to be worked on. And GE is doing a great job doing that.