Aerospace Stocks Face Tough Questions: Can Boeing, GE, Airbus Justify Sky-High Valuations?

Defense and aerospace stocks, as tracked by the iShares US Aerospace & Defense ETF ITA have returned a remarkable 22% year-to-date in 2024; an aerospace expert weighed in on whether companies can keep up with sky-high valuations fueled by tensions in the Middle East.

The Aerospace Analyst: RBC analyst Ken Herbert reiterated Outperform ratings for the following aerospace companies in a note published Monday:

• Boeing Co BA, lowering its price target from $220 to $200.
• General Electric Co GE, raising its price target from $190 to $210.
• General Dynamics Corp GD, maintaining its price target at $320.
• Airbus SE EADSY, lowering its price target from 180 euros to 160 euros.

Industry Takeaways: Herbert noted the industry’s impressive performance in 2024.

“Investor sentiment into 3Q24 A&D results is positive on defense stocks, with concerns about near-term incremental upside after the recent strength for many defense stocks. Sentiment seems universally bullish on the aerospace aftermarket, although these stocks appear about as crowded on the long side as we have seen,” the analyst said. “We believe the aero OE outlook is uncertain at best.”

The analyst noted his belief that aerospace valuations will hold in the near-to-mid term.

Boeing Takeaways: Herbert says that Boeing’s current risk-to-reward is favorable.

“We believe we are ~36 months into what should be a 4-to 5-year order cycle. Granted, the world is different today than it was for any prior cycle, but we expect demand for narrowbody aircraft to remain strong,” Herbert said.

The analyst believes that the ongoing labor strike at Boeing will be resolved before it releases its third-quarter earnings.

GE Aero Takeaways: Although Herbert raised General Electric’s price target, he simultaneously lowered expectations of 2024, 2025 and 2026 LEAP engine deliveries.

“While we are more cautious on revenue growth, we are raising our estimates for adj operating income and adj. EPS as GE Aero benefits from mix,” the analyst said. “We believe the healthy aftermarket demand fundamentals and continued favorable pricing on spare parts will offset downside risk to new LEAP deliveries, although investors will likely be focused on execution for this program.”

Herbert believes that the bear case for GE is “fading” amid efforts to derisk its balance sheet.

General Dynamics Takeaways: Herbert’s lowering of General Dynamics’ price target comes amid pessimism in Gulfstream delivery estimates. The analyst sees headwinds ahead in delivering its G700 aircraft.

Herbert is still bullish on the company, with a perceived upside amid the continuing war in Ukraine.

Airbus Takeaways: The analyst’s lowered price target is attributed to lower delivery estimates in the near term. He believes the stock can perform well, even though the company will likely walk back its mid-decade target of 1,000 deliveries.

Herbert sees Airbus’ core strengths as its strong backlog, cash position and margin expansion.

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