EARNINGS RADAR RESEARCH
Earnings Up 36%, Cash Flow Down 14% — Why GE Still Looks Pricey
2026.10.21 · ≈ 21 min read
GE
In the third quarter, GE Aerospace grew adjusted earnings per share 36% year over year, booked $19.0 billion of total orders (up 49%), and raised every line of its full-year guidance. Yet the same report showed free cash flow down 14% from a year earlier. The stock fell about 4% on results day, leaving the company worth $307 billion. Profits and cash are moving in opposite directions, and the market voted against a report that beat expectations. This note asks two questions: how much of GE's earnings growth actually turns into cash, and how much of that future cash the current share price has already paid for.
1What the Quarter Actually Showed
The short version: profits beat expectations, cash flow lagged, and orders and backlog offered rock-solid evidence of demand. What the market is worried about is how quickly those profits become cash.
The headline numbers:
▪Revenue · $14.1 billion on a GAAP basis (GAAP is the standard accounting rulebook), up 16%; adjusted revenue of $13.3 billion, up 18% (company 8-K, 2026-10-20). The revenue consensus tracked by the media was about $12.84 billion, so this was a clear beat (24/7 Wall St., 2026-10-20)
▪Adjusted earnings per share (EPS) of $2.25, up 36%, which was $0.26, or about 13%, above the $1.99 consensus (company 8-K; 24/7 Wall St., 2026-10-20)
▪GAAP EPS from continuing operations of $2.32, up 14%; GAAP net income of $2.41 billion (company 8-K, 2026-10-20)
▪Operating profit of $3.0 billion, up 30%, for an operating margin of 22.5%, up 220 basis points (a basis point is one hundredth of a percentage point) (company 8-K, 2026-10-20)
▪Free cash flow of $2.0 billion, down 14%; operating cash flow of $2.2 billion, down 14% (company 8-K, 2026-10-20)
▪Total orders of $19.0 billion, up 49%, including $15.27 billion from Commercial Engines & Services (CES), up 58% (company 8-K, 2026-10-20)
▪Full-year adjusted EPS guidance raised from $7.65–7.85 to $8.00–8.10. The $8.05 midpoint sits about 1.5% above the pre-report consensus of $7.93 from 22 analysts (company 8-K; consensus snapshot 2026-10-20)
Lining up the three quarters side by side tells you more than any single quarter does:
▪Q1 · adjusted revenue $11.6 billion, up 29%; operating margin 21.8%, down 200 basis points; CES margin 26.4%; free cash flow $1.7 billion (company 8-K, 2026-04)
▪Q2 · adjusted revenue $12.6 billion, up 24%; operating margin 21.7%, down 130 basis points; CES margin 27.3%; free cash flow $3.0 billion, up 43% (company 8-K, 2026-07-16)
▪Q3 · adjusted revenue $13.3 billion, up 18%; operating margin 22.5%, up 220 basis points; CES margin 27.9%; free cash flow $2.0 billion, down 14% (company 8-K, 2026-10-20)
Revenue growth slid from 29% to 18%, yet margins flipped from shrinking year over year in the first half to expanding in Q3. That is what "operating leverage" looks like when it starts to pay off: costs grow more slowly than sales. Engine deliveries are changing gear too. In the first half, total deliveries rose 31% and LEAP deliveries rose 41%; in Q3 alone, total deliveries grew just 8% and LEAP just 5% (company 8-K, 2026-07-16 and 2026-10-20). Slower growth, fatter margins, weaker cash, all at the same time. Is one cause behind all three?
Break it apart and the margin improvement comes mostly from services. In Q3, CES services revenue rose 17%, spare-parts revenue grew more than 20%, and internal shop-visit revenue rose 12% (company 8-K, 2026-10-20). Spare parts are the most profitable slice of this business. The cash shortfall has different roots. Media summaries of the earnings call point to bigger sales allowances on newly installed engines and spare parts, higher reserves for durability repairs, and deferred revenue on the GE9X engine because certification of a mid-section seal is not yet finished (24/7 Wall St., 2026-10-20). Profits can be booked on the income statement first; the cash has to wait for deliveries, certifications and customer payments. The gap between the two is working capital, the money tied up in inventory and unpaid bills.
The full-year math. Adjusted EPS for the first three quarters adds up to 1.86 + 2.02 + 2.25 = $6.13. To land in the $8.00–8.10 range, Q4 only needs $1.87–1.97. Q4 2025 was $1.56 (full-year $6.37 minus the first three quarters), so that implies growth of 20% to 26% year over year, and actually a 12% to 17% drop from Q3. That earnings bar is low; management has given itself plenty of room. The bar that matters is cash. Full-year free cash flow (FCF) guidance is $9.1–9.4 billion. The first three quarters delivered $6.728 billion, so Q4 has to produce $2.37–2.67 billion. Q4 2025 was roughly $1.77 billion ($7.7 billion for the full year minus $5.933 billion for the first three quarters), which means Q4 FCF needs to grow 34% to 51% year over year. That is the single number to watch in the next report. It will tell us whether Q3's 14% decline was just a timing mismatch or a sign that earnings quality is thinning.
On demand, there is almost nothing to pick at. The commercial services backlog exceeds $170 billion. In management's words: "We are raising our 2026 guidance across the board, and we now expect 2027 commercial services to grow low-double-digits supported by our over $170 billion commercial services backlog." (company 8-K, 2026-10-20) The supply-side comment is just as revealing: "Increased material input from priority suppliers double-digits year-over-year, contributing to strong year-to-date Commercial Engines Services (CES) services revenue and total engine deliveries, including LEAP growing 26%." (company 8-K, 2026-10-20) In plain English: this year's 26% LEAP growth was squeezed out only because key suppliers shipped double-digit more material. The bottleneck in this business is still supply. And guiding 2027 commercial services growth to "low-double-digits," a step down from this year's low-20s pace, is management's own slowdown signal.
2Where the Money Comes From: Earnings Quality and Cash Conversion
GE Aerospace is not short of money. This section asks how "real" its profits are, and how an $11.75 billion acquisition will reshape the balance sheet.
▪Accounting gap · Q3 GAAP EPS of $2.32 came in above adjusted EPS of $2.25, but GAAP EPS grew only 14% while adjusted EPS grew 36% (company 8-K, 2026-10-20). The extra GAAP profit comes from non-operating gains, and last year's GAAP base had even more of them. So GAAP growth understates the core business, while the GAAP level overstates it. You have to strip it apart both ways
▪GAAP profit margin was 19.9%, down 80 basis points, while operating margin expanded 220 basis points (company 8-K, 2026-10-20). The two lines moving in opposite directions show that part of the operating improvement was offset by non-operating items
▪Cash conversion · Q3 FCF of $2.0 billion against GAAP net income of $2.41 billion is a conversion rate of about 83%. Full-year guidance still calls for conversion above 100%; in 2025 it was 113% (company 8-K, 2026-10-20)
▪Stock-based compensation · the quarterly press release does not disclose it, so there is no single-quarter figure yet. We will need the 10-Q
Conversion was 113% in 2025, full-year guidance is above 100%, yet Q3 managed only 83%. That means Q4 has to convert well above 100% to make up the gap, which is the same Q4 cash hurdle from Section 1 viewed from a different angle. No need to panic: there are sensible explanations. When delivery volumes rise, inventory and receivables soak up cash first, and the GE9X revenue deferral means costs already spent are not yet matched by revenue. But durability reserves and sales allowances are genuine outflows of profit and cash. They will not flow back on their own with time.
The other big use of cash is the acquisition. On September 8, the company announced it would buy casting supplier Consolidated Precision Products (CPP) for $11.75 billion: $7 billion in cash and the rest in new debt, with closing expected in the second half of 2027. The price is about 26 times CPP's expected 2027 EBITDA (a rough measure of operating cash earnings), or about 18 times after counting expected cost savings (company press release, 2026-09-08; BNN Bloomberg, 2026-09-08). Against a $307 billion market value, the roughly $4.75 billion of new debt is about 1.5% of market cap, so leverage pressure is modest, and with no new shares issued, existing shareholders are not diluted. The real issue is opportunity cost. The $7 billion in cash is close to three-quarters of full-year FCF guidance. It could have gone into buybacks; instead it buys a supplier at 26 times EBITDA, and the payoff depends on a steadier supply chain speeding up deliveries, which will be hard to isolate and verify in the financial statements.
3The Supply Chain: Who Supplies, Who Pays
The upstream bottleneck is plain to see: high-temperature alloy castings and forgings. GE calls the suppliers that hold it back "priority suppliers," and in Q3 their material input rose by double digits year over year (company 8-K, 2026-10-20). Choosing to buy casting maker CPP outright is itself an admission that outside sourcing is not reliable enough. Howmet (HWM), the large castings and forgings maker in the same peer group, grew revenue 38% this quarter (peer disclosure summary, 2026Q3), which shows how full upstream order books are. Suppliers with pricing power mean GE's costs are inflating, which fits the earnings-call remark that "mix and inflation offset the contribution from volume and pricing" (24/7 Wall St., 2026-10-20).
Downstream has three layers. The biggest is the airlines. Major deals called out in Q3 include IndiGo's largest-ever LEAP agreement, covering more than 1,000 engines, and a Turkish Airlines agreement for more than 300 engines (company 8-K, 2026-10-20). These deals deserve some caution. Engine orders usually mix firm units with options, deliveries stretch over a decade, and the company does not disclose individual deal values. The press release does not say whether the backlog counts only the firm portion or the upper limit including options. The defense "up to $2.9B" contract is likewise a ceiling figure (company 8-K, 2026-10-20); what actually gets billed depends on annual task orders.
The middle layer is the airframe makers. LEAP is the only engine on Boeing's 737 MAX and competes head to head with Pratt & Whitney's GTF on the Airbus A320neo, so GE's new-engine delivery pace is tied to how fast both planemakers ramp up. CFM delivered 1,030 LEAP engines in the first half, up 41% (Safran half-year report, 2026-07-28), so engines are no longer the slowest link in the industry.
The most fragile link actually sits in the most profitable layer: the aftermarket. A large share of the $170 billion services backlog is long-term maintenance contracts billed by flight hour. Revenue follows flight hours, so if airlines cut capacity because of fuel prices or weaker demand, the drop in flight hours hits services revenue directly. And when durability problems drive more frequent repairs, GE absorbs the extra shop costs under fixed-rate contracts. That is exactly where Q3's higher reserves came from.
4How GE Stacks Up Against Peers
Among third-quarter readings from the aerospace and defense peer group, margins and growth are what can be compared directly with GE (peer disclosure summary, 2026Q3):
▪Operating margin · HEICO 24.3%, GE 22.5%, Northrop Grumman 11.4%, RTX 10.5%, General Dynamics 10.4%
▪Revenue growth · Howmet 38%, HEICO 21%, GE's Defense & Propulsion Technologies segment 7%, GD 8.1%, NOC 7%, LHX 7%
Among large peers, GE's margin trails only HEICO, whose business is mainly aftermarket parts, and is double that of the defense-heavy names. That is the foundation of the premium the market pays for aftermarket businesses. Meanwhile, upstream Howmet is growing far faster than GE, a sign that pricing power and growth upside in the supply chain are concentrating in castings and forgings. That is the backdrop to GE's decision to buy CPP.
The most direct comparison is Safran, GE's partner in the CFM joint venture. In the first half, Safran's revenue was €17.57 billion, up 19% (organic growth 20.2%), with a recurring operating margin of 18.4%. Civil engine spare-parts sales rose 27.9% in dollar terms, civil engine services rose 40.4%, and full-year civil aftermarket growth guidance was raised to the mid-to-high twenties (Safran half-year report, 2026-07-28; Leeham News, 2026-07-28). Both companies live off the same LEAP engine, yet Safran's aftermarket is growing noticeably faster than GE's Q3 services revenue growth of 17%. Part of that is because spare-parts demand from the older CFM56 fleet carries more weight in Safran's numbers, and part is differences in how the two recognize services revenue. Still, the direction is a reminder: within its own supply chain, GE's services growth is no longer the fastest.
As for how the market is pricing similar report cards, the comparable peers have not reported yet this quarter. Safran's Q3 revenue does not come out until October 23 (Safran announcement), so there is no sample to compare against, and we will not force one.
5Valuation: How We Measure It and What It Says
The classic price-to-earnings (P/E) anchor still works, but it needs to be forward-looking and paired with a free-cash-flow yardstick, because GAAP profit here is mixed with non-operating items and cash conversion is exactly where this quarter's debate lies.
▪Market cap of $307 billion; trailing twelve-month (TTM) P/E of about 34.9x
▪Forward P/E · using the $8.05 midpoint of full-year adjusted EPS guidance, about 36.8x
▪Price-to-FCF · market cap divided by the $9.25 billion midpoint of full-year FCF guidance, about 33x, equal to an FCF yield of about 3.0%
▪PEG (P/E divided by growth rate): about 2.8x, using 12.8% earnings growth
▪Enterprise value (EV) · after the CPP deal closes, about $4.75 billion of new debt plus $7 billion of cash going out will lift EV by about $11.75 billion, roughly 3.8% of market cap, or about one turn on EV/FCF
▪Wall Street · of 32 covering firms, 9 rate it strong buy, 19 buy, 3 hold and 1 sell, so 88% are bullish
What does 36.8x mean in practice? If services growth really slows to low-double-digits in 2027, earnings growth will most likely land in the teens, which means the market has prepaid for the next two to three years of growth. A PEG near 2.8 says growth is already fully priced in; any further upside needs growth to keep beating expectations, and Q3 was precisely a quarter when growth slowed and cash lagged. This quarter's share-price reaction looks like a classic one-sided "Davis effect": earnings are rising while the multiple is being squeezed. The improvement has already been priced into the stock, so further gains have to come from earnings slowly grinding the multiple down.
6Where We Are in the Cycle
The jet-engine business runs on two cycles: the new-aircraft delivery cycle and the aftermarket maintenance cycle. The first depends on planemaker capacity; the second on how many hours the in-service fleet flies and how often engines go into the shop. More than 70% of GE's profit comes from the second. Three readings help locate it:
▪Pricing · spare-parts revenue rose more than 20% in Q3, and management lists price increases as a growth driver (company 8-K, 2026-10-20; 24/7 Wall St., 2026-10-20). Spare-parts pricing is still moving up
▪Tightness · material input from key suppliers rose by double digits, deliveries are still constrained by castings and forgings, and GE went as far as buying an upstream supplier (company 8-K, 2026-10-20; company press release, 2026-09-08). Supply is still tight
▪Backlog and visibility · the commercial services backlog exceeds $170 billion and Q3 CES orders rose 58% (company 8-K, 2026-10-20). Visibility is very high
Our read: the aftermarket cycle is in the middle-to-late stage of its upswing. Rising prices, tight supply and growing orders are all upswing traits. But management has stepped 2027 commercial services growth down from this year's low-20s to low-double-digits, and Safran's spare-parts growth leans heavily on the older CFM56 fleet, whose peak in shop visits will gradually pass over the next few years. The gear change is already written into guidance.
Two leading signals worth tracking. First, airline capacity: when fuel prices are high, airlines cut their least profitable routes first. Lower flight hours feed into flight-hour-based services revenue one to two quarters later, so watch the quarterly capacity guidance of large US and European carriers. Second, the used serviceable parts market: if more second-hand engine parts stripped from retired aircraft come onto the market and prices fall, the spare-parts shortage is easing, and room to raise prices on new parts will shrink with it.
7Short-Term Money Flows
This section deals with week-level signals for timing entries and exits over the next few weeks. Readers holding for a year or more can skip it.
▪The commercial aerospace sub-sector sits in the weakest tier of sector money flow and has for 43 consecutive days, with a money-flow strength reading of -29, a moderate net outflow (as of 2026-10-21)
▪Net outflow totaled 139.5 million shares over the last 5 trading days and 571.9 million shares over the last 20. These are estimated share volumes derived from price and volume, not dollars (as of 2026-10-21)
▪The sub-sector's share price moved -0.6% over 5 days. On the relative rotation chart it sits in the "improving" quadrant, and on the price-volume divergence screen it shows up on the accumulation side, where money flow is strengthening while price has not yet moved (2026-10-21)
▪The parent sector, Industrials, sits in the middle tier and has not moved up or down in the last 30 readings (2026-10-21). Energy is in the strongest tier; Materials, Financials, Consumer Staples and Utilities are in the second-strongest; Technology and Communication Services are at the bottom (2026-10-21)
In trader-speak: commercial aerospace has been steadily sold for two months, but the selling is slowing, relative strength is starting to turn up from the bottom, and the share price has not caught up yet. Money is tentatively coming back, but it is not a trend yet.
At the whole-market level, conditions are neutral, with a regime reading of -15 and the broad asset-rotation signal tilted risk-off (2026-10-21). The main direction of money is out of Technology and into Consumer Staples, Materials and Financials, with pair strengths of 1.72, 0.73 and 0.54 respectively (2026-10-21). The sub-sectors with the biggest inflows are beauty and personal care, social media and integrated oil and gas; the biggest outflows are in drones, critical metals and eVTOL (electric vertical take-off and landing aircraft) (2026-10-21). GE's sector is not part of any rotation group currently forming, which means there is no sector-level money tailwind in the short run.
One signal works against GE. An energy rotation group is now established, with refining and integrated oil and gas both upgraded one tier on October 16 (2026-10-16), against a backdrop of stronger energy pushing up inflation data. High oil prices are a cost for airlines, and for GE they mean the risk of capacity cuts, so the stronger energy gets, the harder it is for commercial aerospace to attract new money. On the other hand, travel booking and cruise lines were upgraded one tier on October 20 (2026-10-20), and a consumer discretionary rotation is starting to sprout. That is a positive signal on travel demand. The two forces are pulling against each other.
8The Verdict: Long Term and Short Term, Separately
Long term (quarters to years): worth following. LEAP's position on single-aisle aircraft, a services backlog of more than $170 billion and a 22.5% operating margin are moats that will be hard to shake over the next several years, and full-year guidance was raised across the board again this quarter. The costs of owning it are also out in the open: a 36.8x forward P/E has prepaid two to three years of growth, services growth is set to slow to low-double-digits in 2027, Q3 FCF fell 14% year over year, and a deal priced at 26 times EBITDA has to be digested. So any position should follow the checkpoints. The first test of earnings quality is whether Q4 FCF can grow more than 30% year over year. The second is whether services growth and FCF conversion in the full-year 2027 guidance still hold up. Pass both, and earnings can gradually grow into the multiple; fail either, and the multiple is likely to compress faster than earnings grow.
Short term (days to weeks): don't chase. Sector money is still flowing out, just more slowly. After the report, the stock dropped to roughly 10% below both its 50-day and 200-day moving averages, so those averages have turned from support into overhead resistance. The broad market leans risk-off, strong energy is a headwind for the aviation chain, and the sector is not in any rotation group, so there is no visible new money to fuel a rebound. The sensible approach is to wait for money flows to turn first and for the price to find its footing again before acting.
The second half lays out exactly which numbers define those two conditions, and where the three reference price levels come from.
9Action Plan
Entry conditions (act when both are met; if only one is met, at most a small trial position):
▪Money-flow condition · the commercial aerospace sub-sector ends its run of net outflows, with the money-flow strength reading turning from negative to positive and staying there for at least 5 trading days, while the 5-day net flow turns into a net inflow. As of 2026-10-21, the reading is -29 after 43 straight days of outflows. You can check this one in every daily review
▪Fundamental condition · Q4 FCF of at least $2.37 billion, the bar implied by the low end of the $9.1–9.4 billion full-year guidance, equal to 34% year-over-year growth; plus a CES margin back above 28%, showing that Q3's reserves and allowances were a one-off strain. That report is expected in late January 2027
Three reference price levels:
▪Lower edge of the watch zone, $282: the $8.05 midpoint of full-year adjusted EPS guidance times 35, with 35x roughly matching the current TTM P/E of about 34.9x. With the stock at $295.88, this line is about 5% away. A drop to here would mean the market is giving the new guidance only the same multiple it gave past earnings, which starts to create a valuation margin of safety. The watch zone runs from $282 to $296; the intraday low on results day, about $297.8 (MarketBeat, 2026-10-20), sits just near the top of that range
▪Overhead resistance, $324–328: the cluster formed by the 200-day moving average at $323.74 and the 50-day moving average at $327.93. The stock traded around this band for a long stretch before the report, so investors who bought there and are now underwater are likely to sell as the price returns to it. Only a high-volume move above $328 would show that the short-term bearish setup has been reversed
▪Thesis invalidation level, $241.5: $8.05 times 30. A drop to here would mean the market is now pricing GE as an ordinary high-quality industrial, effectively concluding that the aftermarket cycle has peaked and the premium has lost its basis. It is about 18% below the current price, which is far, so it comes with an early warning: if the stock closes below $282 for 3 trading days in a row while the sub-sector's money-flow reading shows no improvement, the decline is being confirmed by money flows. At that point, scale back position expectations and wait for the fundamental condition to be met before reassessing
The invalidation level is derived from a multiple because the long-term thesis rests on whether earnings can keep growing into the valuation. A break below the price that equals 30x is the market voting that thesis down. Better to watch that valuation anchor than a technical level.
10Tracking Checklist and Catalyst Calendar
Daily:
▪Commercial aerospace sub-sector money-flow reading and the count of consecutive outflow days: a positive reading held for 5 trading days meets the money-flow condition; a reading below -50 or a clearly widening 5-day net outflow means keep avoiding it in the short term
▪The share price versus the $282 line and the $324–328 band: 3 straight closes below $282 trigger the early warning
Weekly:
▪Rotation status of Energy and Consumer Discretionary: Energy continuing to move up a tier while the early discretionary rotation fizzles is bad for the aviation chain; travel and cruise staying in positive territory is a tailwind for travel demand
▪The market regime reading and risk-on or risk-off signals: a shift to risk-on tends to help high-multiple growth stocks first
Quarterly:
▪GE's Q4 FCF (threshold $2.37 billion) and CES margin (threshold 28%): both met means the fundamental condition is satisfied; FCF below $2.1 billion means the cash shortfall was not just timing, and the long-term thesis needs a fresh look
▪Commercial services growth and FCF conversion in full-year 2027 guidance: services growth below low-double-digits, or conversion guidance below 100%, weakens the long-term thesis
▪Aftermarket growth at Safran and RTX: an overall aftermarket slowdown of more than 5 percentage points across the chain would signal the cycle is changing gear
What triggers a supplementary update: the money-flow condition being met, the early warning firing, Q4 FCF being reported, 2027 guidance being issued, any wobble in regulatory approval of the CPP deal, or airlines making large-scale capacity cuts. Any one of these prompts an update.
Catalyst calendar:
▪October 23, 2026 · Safran Q3 revenue; watch whether civil aftermarket growth is still in the mid-to-high twenties (Safran announcement)
▪Late October 2026 (expected): RTX Q3 results; watch repair progress on Pratt & Whitney's GTF and aftermarket growth (RTX historical reporting schedule)
▪Late January 2027 (expected): GE Q4 results and full-year 2027 guidance (GE historical reporting schedule)
▪First half of 2027 (expected): progress on GE9X mid-section seal certification, which determines when deferred revenue gets recognized (24/7 Wall St., 2026-10-20)
▪June 2027 (expected) · Paris Air Show, the annual window for single-aisle orders and LEAP delivery pacing (the show's customary every-other-year schedule)
▪Second half of 2027 (expected): CPP deal closing (company press release, 2026-09-08)
Appendix: Risk Factors
▪Higher oil prices or weaker demand lead airlines to cut capacity, and lower flight hours drag on services revenue
▪LEAP durability problems worsen, pushing reserves and repair costs higher and eating into profits and cash flow
▪Disruption in the supply of key castings and forgings leaves deliveries below guidance
▪The valuation is elevated; if growth slows, the multiple may compress faster than earnings grow
▪Integration of the CPP acquisition disappoints or approval is blocked, diluting returns on capital
We check every condition on this note's tracking checklist against the latest data every day. If any one of them triggers, a supplementary update goes out alongside that day's daily review, so readers do not need to watch the data themselves. The financial figures, money-flow readings and valuation multiples cited here can all be verified on the corresponding data pages of our website, with dates and sources marked in the text. GE's story has a long way to run, and fourth-quarter cash flow will be where it gets tested next.
This article was produced on the NextPick research workbench; every money-flow, tier and valuation figure it cites can be verified on the corresponding data surfaces of the site, and the moment any tracking condition listed in the report triggers, an addendum will go out together with that day's daily review.