The recent performance of GE Aerospace has sparked noticeable market reactions, particularly following its latest earnings report for the fourth quarter of 2025. The company’s shares experienced a considerable sell-off attributed to its implied guidance indicating that operating profit margins would remain largely unchanged from previous years. This news drew concern, especially in light of GE’s anticipated revenue growth in the low double digits for 2026.
However, a closer examination of GE Aerospace’s fundamentals suggests that such market reactions may be overly dramatic. Several factors indicate a potentially favorable long-term earnings outlook for the company, despite the immediate concerns regarding profit margins.
Central to GE Aerospace’s operations is its significant role in designing and manufacturing commercial aircraft engines, including notable models like the CFM56 and the LEAP. A critical component of their business model is the understanding that new engines are often sold at a loss initially; this strategy paves the way for lucrative service and aftermarket revenue, which can be generated through long-term service agreements as aircraft engines generally have a lifespan extending beyond four decades.
The scrutiny of GE Aerospace has intensified due to the supply chain disruptions that emerged post-pandemic. Airlines facing challenges in maintaining fleet readiness opted to increase their spare engine inventories, resulting in a higher spare engine ratio— the proportion of engines held as spares compared to those actively in use. However, as these supply chain issues gradually wane, airlines are now shifting towards reducing their spare engine holdings.
This strategic pivot directly influences GE’s profit projections, with CFO Rahul Ghai acknowledging that the company’s margins are expected to plateau into 2026 due to the decline in spare engine demand. As the focus shifts toward deliveries of LEAP engines for direct installation rather than spares, the company anticipates a temporary impact on their profit margins.
Despite the near-term margin pressures, GE Aerospace’s management has highlighted two encouraging indicators that suggest a more optimistic long-term trajectory. Firstly, the ongoing utilization of GE engines remains robust, with projected retirement rates in 2025 mirroring those of 2024, and Ghai estimates a retirement rate of about 2% for 2026. This scenario implies that a greater number of older aircraft will remain operational, fostering continued opportunities for aftermarket sales.
Secondly, while a decline in spare engine sales may pose challenges in the short run, it positions GE for enhanced profitability in the long term. When engines are installed and actively used, they generate more consistent revenue compared to spare engines, which languish unused. GE’s strategy to ramp up LEAP deliveries as supply chain conditions improve reinforces this positive outlook, supporting the case for long-term growth despite temporary profitability challenges.
In summary, while GE Aerospace may not appear to be an inexpensive stock given its valuation—trading at nearly 40 times anticipated earnings for 2026—there’s no compelling reason derived from this earnings report to deter long-term investors. The recent sell-off appears disproportionate, suggesting that a deeper analysis may uncover viable investment opportunities in GE Aerospace as it navigates through transitional market conditions.
