GE Aerospace Goes Vertical (Integration)

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Tyler Crowe (0:32)

Specialization is out, vertical integration is back. Motley Fool Hidden Gems Investing starts now.

Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors, Lou Whiteman and following in for spot duty, we got Travis Hoium today on the Tuesday show.

We're going to talk about cybersecurity. It's been in the news lately and we had a company, Boston Scientific, make a pretty significant announcement related to the impacts of cybersecurity and hacks that have happened recently. Going to get into the mail back, but we want to start today with, I wouldn't say the biggest news, but certainly something that is worth discussing. GE Aerospace announced it is acquiring private company Consolidated Precision Products for about $11.7 billion. It's one of those precision manufacturing companies owned by private equity. For a $352 billion company that is GE Aerospace, it's not a small deal, but it's not necessarily big either. Management claims it will be about earnings per share accretive in year one. We'll see. But I think more than anything, this is a strategic move. Consolidated Precision Products is one of four major component manufacturers in this industry, kind of building like jet turbine blades and things like that. So I guess my question is, Travis, when you looked at this deal, what was your knee-jerk reaction here?

Travis Hoium (1:54)

I think it makes a ton of strength sense strategically, especially if this is one of your bottlenecks, you see growth and demand that you can maybe meet if the supplier would just supply you with a little bit more stuff when you need it. So from that sense, I think it makes a lot of sense. The price is a little bit wild when you look at the industrial space and energy. Typically, these companies aren't going for 26 times EBITDA, which is what this deal was for. They said it's going to be less than that after things like synergies.

To your point about it's going to be EPS accretive, well, it's going to be accretive because they're using cash on the balance sheet and debt to be able to fund it. So if you're not issuing shares, I don't think it probably would be all that accretive if they were just buying it with stock. But that's going to lever up the balance sheet. So pulling $7 billion in cash off the balance sheet, going to add a little bit more debt, just makes the company a little bit more risky. So strategically probably makes a lot of sense. Financially strictly, is it going to be that big a deal? Probably not.

Lou Whiteman (2:52)

Right. 26 times EBITDA, but GE is trading 28 times EBITDA on an enterprise value basis. So certainly, they're not using that stock, they're not using that currency, but valuations are crazy high right now across the board. I think this is GE saying that they think that that level is sustainable even if it's not going up from here. So I think it's unreasonable historically, but I think maybe a little more reasonable given the players today and the opportunity GE sees.

Tyler Crowe (3:21)

The interesting thing to me, and we talked about the money aspect of it, and from a financial, I don't think we're going to see a huge bump in earnings per share from this one. Like you said, it's a critical component.

They're probably paying out the nose to get it because it, like as I said, precision products is one of the four manufacturers of these particular types of things. So keeping that in mind, like there are other companies in these industries. We've got Pratt & Whitney over at RTX, Rolls-Royce, anybody else who's building jet engines, and that's just one of many examples in the aerospace and defense industry where these are critical components are being bought. So I'm thinking of it in almost like a sense of like the winners and the losers here because if GE Aerospace is taking all this in house, I would assume that they're not doing it so they can sell to other people, right? So who's going to win and lose in the industry as a result of this kind of integrating a major component manufacturer?