GE Aerospace beat Wall Street's Q3 forecasts on earnings and sales, yet its shares fell on the day. Free cash flow declined and the stock's valuation may explain the reaction, according to The Motley Fool's analysis.
GE Aerospace slipped 2.1% through 11 a.m. ET on Tuesday even though its Q3 report topped analyst expectations. The engine maker, which remained after General Electric spun off its power and healthcare businesses in 2024, reported results that beat the Street on both lines.
Results top analyst forecasts
Analysts expected $2 per share on $12.85 billion in sales. Instead, GE Aerospace earned $2.25 per share, and its sales reached nearly $13.3 billion, adjusted for one-time items.
On a GAAP basis, revenue grew 16% to $14.1 billion, driven primarily by engine sales to commercial carriers. Commercial sales rose 21%, while the defense business grew 7%. GAAP earnings per share climbed 14% to $2.23, and operating profit surged 30% to $3 billion.
Cash flow and margin slip
Not every figure improved. Profit margin declined 80 basis points to 19.9%, and free cash flow fell year over year to $2 billion.
Orders, however, grew 49% in the quarter to $19 billion. That works out to a 1.35 book-to-bill ratio, which implies that sales and profits will continue to accelerate in future quarters, according to the article.
Guidance and valuation
GE Aerospace also updated its outlook through the end of the year. Management now expects revenue to grow at least 19%, yielding operating profit of perhaps $11 billion and adjusted earnings per share of about $8.05. Free cash flow, which missed analyst targets in Q3, should reach $9.1 billion or better by the end of 2026, at least an 18% improvement over 2025.
Even so, the stock is priced north of 36x free cash flow with only an 18% growth rate. Author Rich Smith calls that the upper edge of what he considers a fair price, and probably another reason the stock is falling after an earnings beat.
Source: The Motley Fool
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