One of my favorite ways to find new ideas is to look at the recent buys and highest-conviction bets of investors I admire. Chris Hohn is high up on that list. His fund has compounded at roughly 18% a year since 2004, and it does so with a very concentrated portfolio.

What I like most about Hohn is his talent for finding best-in-class businesses before the market catches up to them. And he follows that up with incredible conviction.

Very few investors follow through to the point where a single stock makes up a third of a $50 billion portfolio. For Hohn, that stock is GE Aerospace.

Shawn, Kyle, and I have covered a good part of the aerospace value chain by now, from Copa as an airline to TransDigm and Heico as parts suppliers. GE sits above all of them. It builds the engines, and it controls the aftermarket for those engines for decades. It’s safe to say that GE is the pinnacle of quality in this industry.

The only problem has always been the price. But with the stock down more than 20% from its August high and a fresh set of quarterly numbers on the table, this felt like the right moment to finally do the work.

— Daniel

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We need to talk about GE’s history because it’s a crucial part of why GE’s business model is so successful today. But before we go there, let me explain what exactly GE Aerospace does and where it’s positioned in the aerospace value chain.

Generally, the higher up the aerospace value chain you go, the better the economics get. Airlines are highly competitive and compete on price, which leaves them with the worst economics. Boeing and Airbus have a duopoly but still struggle to earn sustainably high margins. Parts suppliers like TransDigm and Heico do very well. And GE sits at the top with highly predictable cash flows, a deep moat, and high margins. Although it’s not a monopoly.

There are three big engine makers – GE, Pratt & Whitney (part of RTX), and Rolls-Royce. GE is the biggest by a wide margin, though, with about 40% of the global engine maintenance market. You might ask why there are only three players and whether that can change, given the industry's strong economics.

Well, let’s say the barriers to entry are enormous. A new engine takes roughly a decade and several billion dollars to develop, and the program keeps losing money for years because the company initially sells the engines at a loss.

Both make money in the so-called aftermarket. That’s very similar to TransDigm’s playbook. Meaning, GE makes its money over the 25 to 30 years an engine flies. During that time, engines come into the shop for a major overhaul roughly three times, and each visit costs millions of dollars, mostly in spare parts only GE can make. By GE's own math, every engine brings back about three and a half times its original revenue in services.

In the commercial segment, services are more than 70% of revenue and the vast majority of the profit. The segment earns a 27% margin while the new-engine side is roughly break-even, and returns on invested capital are close to 40%, which is remarkable for a manufacturing business.

About 80% of GE's revenue and almost 90% of its profit come from commercial aviation. The rest is defense. Defense isn’t nearly as good a business for GE as it is for TransDigm, though. TransDigm's parts are such a small share of an aircraft's overall cost that most individual contracts fall below the $2 million threshold at which the Pentagon can demand cost data. That’s why they aren’t margin-capped.

GE’s engines are obviously a major part of an airplane's costs. Thus, they are highly regulated. GE can make around 12 to 13% margin on its cost-plus contracts with profit caps. The advantage, of course, is that fighter jets keep flying in a recession. So while not being a high-margin business, this business is very stable. There’s another huge advantage to the government contracts that we’ll revisit later.

Now, back to the commercial side, which is easiest to understand if we go by plane family. The narrowbodies – the Boeing 737 and the Airbus A320 – are about four out of five planes sold in the world. On the 737 MAX, GE is the only engine option. On the A320neo, airlines choose between GE and Pratt & Whitney, and GE gets somewhere around 55 to 60%. So on the planes that matter most, GE has roughly three-quarters of the market.

To make it even more complex, those planes have two generations of GE engines. The older one, the CFM56, entered service in the 1980s, and somewhere between 19,000 and 28,000 are still flying, depending on whose count you use. It's the largest fleet of any engine ever built. And it's the cash cow since old engines need a lot of maintenance, and GE supplies the parts.

The new generation, the LEAP, has more than 10,000 engines delivered, and the backlog even exceeds that number. Roughly six to eight years of production are already booked.

I'm telling you all this because these engines' long life is a vital part of GE’s moat.

Once an engine is certified on an aircraft type, it's locked in for the life of that aircraft. And, I think it's safe to say, an engine failing is a bit more serious than a luggage bin not closing, which makes customers even more loyal to proven products and, most importantly, original spare parts.

So the player with the largest installed base has a decades-long advantage over competition. And that’s the position GE is in. GE has 50,000 commercial and 30,000 military engines in service.

The biggest risk for this part of the moat is a player like Heico eating into GE's aftermarket with its cheaper copies of spare parts, so-called PMA parts. They are FAA-approved, so technically an alternative. For a long time, GE contractually required that only its own parts would be used; otherwise, the warranty would be void, which is an intolerable risk for a highly expensive aircraft engine. But customers complained to the EU, and in 2018 GE agreed to drop those terms.

Nevertheless, Heico's parts are mostly for older engines and the less critical components. Nobody has a copy of an important LEAP part, and most LEAP engines are on long-term service contracts anyway. More on that in a second. On top of that, about half of all commercial aircraft are leased, not owned by the airlines, and the lessors' contracts usually require original parts to protect resale value.

Now getting back to those long-term service contracts. What this means is that the airline pays a fixed rate for every hour the engine flies, and GE takes care of everything. It's basically an insurance policy the airline buys from GE. This also means all parts come from GE (or a partner) because GE is responsible for the overhaul and the only one overseeing them.

GE has more than $170 billion of commercial services under contract, about four years of last year's revenue for the whole company. And roughly 40% of services revenue comes from these long-term agreements.

There's one catch, though. GE books revenue based on the costs it expects over the whole contract, so if an engine turns out to be more expensive to maintain, profit it already booked gets revised down.

This happened on the LEAP, for example. It burns about 15% less fuel than the CFM56. But it does so by running hotter. And hotter parts wear out faster. Especially in naturally hotter and dustier places like the Middle East or India, this is a problem. Instead of coming in after five years, some engines needed their first overhaul after a year and a half. Under those contracts, GE paid for it, which is why maintenance on the new engines only broke even in 2024.

GE has since certified a fix that roughly doubles the time on wing, but it goes in as engines come through the shop, so the whole fleet won't be upgraded until the early 2030s.

Part of what I love about investing is that you get to learn so much about company history, too. I’m a bit of a history nerd, so I like to take those detours. If you don’t, feel free to skip this part. But going through the history of GE and aviation also helps to understand why GE is such a great business today. It’ll also explain why the defense business, despite mediocre margins, is extremely attractive for GE.

The “story” starts in 1917, during the First World War, when the U.S. government asked GE and an engineer named Sanford Moss to build turbo superchargers for military aircraft. Moss, by the way, hated flying and refused to fly in the test aircraft. I jokingly told Shawn on the show that, looking at the first “attempts” at building airplanes, the world would’ve had to wait much longer for planes if value investors had been tasked with it. There’s no way I would’ve trusted any of those things with my life.

But Moss’ example made me think value investors might have had a place in early aviation after all – we would’ve just refused to test our own concepts.

Anyway, I’m digressing. GE ended up building more than 100,000 of those turbo superchargers by the end of the Second World War, which is why the Army handed it the job of building America's first jet engine in 1941. That head start in military engines is where GE's know-how in the hottest, hardest-to-make parts of an engine comes from. But the biggest advantage of working with the government is that they finance a significant amount of GE’s R&D (Research and Development) costs. The Pentagon pays roughly half of GE's R&D (the highest budget in the industry), and what GE learns on military engines ends up in its commercial ones.

A good example is the CFM56. Speaking of which, the real foundation of today's business came in the 1970s in the shape of CFM International, a 50/50 joint venture with the French company Snecma (now Safran). GE builds the engine core, the most demanding parts, and Safran builds the fan and the low-pressure turbine.

Funnily enough, the venture almost didn't happen. The core came from the engine of the B-1 bomber, and in 1972, the U.S. refused the export license, with Henry Kissinger personally signing the refusal. It took a Nixon–Pompidou summit a year later to make a deal. GE could ship the cores to France only as sealed units built in the U.S., and France paid an $80 million royalty. At Snecma's plant, the core sat in a locked room that not even the company's president was allowed to enter.

And all that for an engine that got no orders in its first five years. Not a single one. In 1979, the two companies were reportedly two weeks away from freezing the program. Only then did United Airlines order the engine, and in 1981, Boeing made it the exclusive engine on the 737-300. That's where GE's lock on the 737 began.

The CFM56 went on to become the best-selling commercial jet engine of all time; its fleet is still GE's cash cow today, and the partnership has since been extended to 2050. Apparently, sometimes a deep moat is the result of lucky timing.

Today, we only talk about the aerospace business, but for most of that century, the engine business was buried inside one of the world's biggest conglomerates. Jack Welch ran GE from 1981 to 2001, took its market value from about $12 billion to over $400 billion, and built GE Capital into a giant financial business.

Under Jeff Immelt, GE Capital grew to account for more than half of profits, and during the financial crisis, it nearly brought the whole company down. None other than Warren Buffett saved the day, putting $3 billion into GE preferred stock in October 2008, at a 10% coupon.

Immelt's tenure might be one of the best case studies in how not to run a business. He bought Alstom's power business for about $10 billion in 2015, right before the gas turbine market collapsed, and spent $93 billion on buybacks, most of it above $30 a share. The stock eventually bottomed below $7 in 2018, the same year GE was removed from the Dow after being a member since 1907.

Shawn actually told me that he bought GE in 2014 as one of his first investments ever, on the logic that a blue chip like that would surely sort things out. He lost money on it. I guess we've all been there.

Nelson Peltz, who built a $2.5 billion position in 2015, later said he was sure GE was going to file for Chapter 11. A few years after that, he called Larry Culp "the No. 1 industrial CEO on the planet."

Culp was the first outsider to run GE, and he reportedly turned the job down twice. On his first day in October 2018, GE was worth $96 billion. Four weeks later, he cut the dividend to one cent a quarter and wrote down $22 billion in the power business. His most important decision, though, was splitting the company into three: GE HealthCare and GE Vernova were spun off, and the aviation business kept the GE ticker as GE Aerospace.

Together, the three companies are worth somewhere around $600 billion today. That's more than six times your money in eight years, roughly 26% a year, against about 13% for the S&P 500. Not bad for a company that some very smart investors thought was headed for bankruptcy.

So where does GE stand today? Well, the problem it faces right now is what we in Germany call a “Luxusproblem.” Essentially, a first-world problem that exists only because of GE's privileged position today. Long story short, GE doesn't have enough spare parts to meet demand.

The global fleet is unusually old, because COVID halted deliveries and the supply chain never fully recovered. The industry is about 5,600 aircraft short, and the average commercial aircraft is now more than 15 years old, against about 13.5 in the 35 years before the pandemic. For GE, that's great news. Older engines come off the wing more often, and each shop visit tends to be more expensive.

At the same time, the LEAP is only now reaching its first wave of shop visits. GE expects those to grow about 25% a year through 2030, with the more expensive second visits arriving around 2028 or 2029. As Culp put it on the second-quarter call: "It's much more a supply-side challenge than it is demand."

We recorded the episode before GE reported its third quarter on Tuesday, so let me quickly fill you in. On the surface, it was another very strong quarter. Orders were up almost 50%, helped by the Farnborough Airshow, where GE got commitments for more than 1,800 engines, including more than 1,000 LEAPs from IndiGo. Revenue grew 18%, earnings per share 36%, and GE raised its guidance again, now to $8.00 to $8.10 per share for the year.

And yet, the stock couldn’t benefit on the day. The reason, once again, is the services business. Commercial services grew 17% in the quarter, after more than 30% in the first half, and GE now guides to low-double-digit services growth for 2027. So the aftermarket slowdown is now in management's own words, although it's still better than the high single digits some analysts expected.

Honestly, I'm not losing sleep over it. That slowdown is roughly what I built into my model. What I find more telling is the reaction. GE has beaten expectations every quarter this year, and the stock fell on earnings day every single time. At close to 40 times earnings, the good news is already in the price.

We've already talked quite a bit about Culp, so there isn't much to add on management. Before GE, he ran Danaher, where revenue and market value both grew about fivefold, and he brought Danaher's version of the Toyota Production System with him. He once said, "If you've never been yelled at in Japanese while building air conditioners, you haven't lived." Can't say I've been through that yet.

The one somewhat controversial thing is his pay. When the board lowered the targets of his roughly $300 million contract in the middle of COVID, almost 60% of shareholders voted against it. His 2024 pay was about $88 million. That's a lot of money, but when a CEO turns $96 billion into $600 billion, I'm okay with him being paid very well.

What I'm less sure about is the capital allocation. GE spends pretty much all of its free cash flow on buybacks and dividends, with more than $7 billion in buybacks last year alone. We generally like share cannibals, but at 35 to 40 times free cash flow, that's buying stock at a yield below 3%, and I don't know how to feel about that.

But again… a “Luxusproblem.” If GE were to hoard that money on its balance sheet, shareholders likely wouldn’t be happy with that either.

And to their credit, the buybacks only started once the debt was under control. GE carried well over $100 billion of debt a decade ago and is down to about $19 billion today, which is very little given the cash flows. Unlike TransDigm, there's no reason to worry about the balance sheet.

GE is also opportunistically taking part in M&A. In September, GE agreed to buy Consolidated Precision Products, or CPP, for $11.75 billion. CPP makes the castings that turbine blades and vanes are made from, which are the biggest bottleneck in GE's supply chain. Point being, if you can't get enough parts, you buy the company that makes them. The deal is funded with about $7 billion of cash and $5 billion of new debt and should close in the second half of 2027.

The price is about 26 times CPP's expected 2027 EBITDA, which is hefty, and GE justifies it with about $200 million in synergies. "Synergies" is somewhat of a bad word in value investor circles, and it's a bit ironic coming from Culp, whose line about breaking up the old GE was that "focus beats synergies every time." But I can see how it makes sense here.

Before we get to the valuation, let's quickly go through the risks. I see three.

The first is operating leverage (works both ways). When people fly less, profits don't just dip. In 2020, revenue fell 33%, and profit fell 82%, and it took until 2024 to get back to 2019 levels. Services are more resilient than new engines, but airlines in trouble defer shop visits. With flight departures up only about 1% in the third quarter, this isn't purely theoretical.

The second is concentration. TransDigm owns a hundred small monopolies. GE essentially has one enormous product line, and with every new generation, it has to win its spot on the next plane again. The next big one is the successor to the 737 and A320 in the 2030s, where GE and Safran are betting on an open-fan design. If Boeing or Airbus want something else, that's the one scenario I can think of that threatens the franchise itself. I consider this to be highly unlikely, but worth bringing up nonetheless.

The third is the one Shawn and Kyle liked so much about Heico. The more GE uses its pricing power, the more airlines push for rules that let them use cheaper parts. As mentioned before, GE has already agreed with IATA, the airlines' trade association, not to void an engine's warranty just because a certified third-party part was used, and after an EU investigation, Pratt & Whitney's Canadian arm dropped contract terms that blocked used parts. For now, though, nobody else can make the complex parts GE sells.

Alright, time to talk valuation!

Let me walk you through my base case. On the revenue side, I have services growing 21% this year, in line with guidance, and then about 9 to 10% a year through 2030. New engines grow 20% this year and then about 7%, depending on how fast Boeing and Airbus can build planes. Defense grows 10% this year and roughly half that afterward. That gets you to about $69 billion of revenue in 2030, a 10% compound rate.

Shawn was surprised I only expect 9 to 10% given the size of the backlog. But a lot of today's 20%-plus growth is temporary: old engines aren't being retired because Boeing and Airbus can't deliver replacements, the LEAP came into the shop early, and deferred COVID maintenance is still catching up. Long term, you have an installed base growing in the low-to-mid single digits plus pricing, which gets you to 9 to 10% in a normal year.

On margins, I have the commercial segment going from 26% this year to 29% in 2030, as LEAP maintenance margins catch up and losses on the new GE9X widebody engine peak around 2028. Thanks to buybacks, the share count shrinks 2% a year, and the dividend grows in the mid-teens. Put together, earnings per share grow about 16% a year. After Q3, this year's guidance is a little above my model, but a few cents this year matter far less than the one input that decides everything here.

As always with a stock trading at these levels, that input is the exit multiple. GE trades at close to 40 times this year's earnings. I use a range from 20 to 40 times 2030 earnings, weighted toward the middle, which works out to 30 times. On that basis, the fair value comes out at about $264 a share, and with a 20% margin of safety, my buy price is $211. From today's price of $308, the expected return including dividends is about 6.4% a year. If you could buy at $211, it would be closer to 15%.

If GE keeps doing what it does and the multiple stays around 40, you get about 12 to 13% a year. That's the bull case, and it's not a crazy one. Shawn made the point that GE's earnings might be even more durable than Hermès', and Hermès and Ferrari have traded above 30 and even 40 times earnings for years.

But Hermès is also a good reminder of what happens when that multiple comes down. When I pitched it in February, it traded at almost 50 times earnings. It has since fallen more than 40%, while the business has kept outperforming peers. In an admittedly struggling luxury market, though.

The bear case is a macro shock that sends the multiple to the low 20s while profits tumble as they did in 2020. At 20 times, you'd go nowhere over five years, despite all that earnings growth.

Long story short, GE is priced for perfection, which means the twin engine you look for as an investor – earnings growth plus a rising multiple – is already down to one engine (no pun intended). The most likely outcome to me is that the multiple comes down at some point, and even with 16% earnings growth, you get a few years of low returns.

So we are not adding GE Aerospace to the Intrinsic Value Portfolio today, but it's at the top of our watchlist. We'd rather wait until the market isn't treating GE as a business that can do no wrong.

To listen to our discussion of GE Aerospace, or for more company Deep Dives, check out our podcast here.

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