Motley Fool Money - GE Aerospace Goes Vertical (Integration)

Episode Date: September 8, 2026

After decades of spinoffs and separations of various parts, GE Aerospace is now trending toward integration. Its $11.75 billion acquisition of Consolidation Precision Products is taking what business schools have been teaching for years (specialization, capital light) and flipping it on its head. Lou, Travis, and Tyler dissect the GE aerospace deal, how it impacts the aerospace & defense indsutry, and whether we’re on the precipice of integration. Plus, cybersecurity threats and reverse stock splits. Have a question? Email us; [e-mail] Tyler Crowe, Lou Whiteman, and Travis Hoium discuss: - GE Aerospace acquires Consolidated Precision Prodcuts - The winners and losers of the deal - Boston Scientific’s cybersecurity hack fallout - Will cybersecurity make these industries less appealing to investors? - Mailbag: when is a reverse stock split good? Companies discussed: GE, HWM, BA, HONA, RTX, BSX, NVO, CRWD, IBM, BKNG Host: Tyler Crowe Guests: Travis Hoium, Lou Whiteman Engineer: Dan Boyd Disclosure: Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, “TMF”) do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. We’re committed to transparency: All personal opinions in advertisements from Fools are their own. The product advertised in this episode was loaned to TMF and was returned after a test period or the product advertised in this episode was purchased by TMF. Advertiser has paid for the sponsorship of this episode. Learn more about your ad choices. Visit ⁠⁠megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Real Canadian Superstore has everything you need this back-to-school season. Save on lunchbox savers like Ziggy's sliced deli-meat products for always $3.75. And get Life Brand Pure Vita shampoo or conditioner for $8 each. At Real Canadian Superstore, when you're ready, we're ready, with a whole world and more. Specialization is out. Vertical integration is back. Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing.

I'm your host, Tyler Crow, and today I'm joined by longtime Fool Contributors, Lou Whiteman, and pulling in for Spot Duty. We got Travis Hoyum today on the Tuesday show. So we're going to talk about cybersecurity. It's been in the news lately, and we had a company, Boston Scientific, make a pretty significant announcement related to the impacts of cybersecurity

and hacks that have happened recently. We're going to get into the mailback, but we wanted to start today with, I wouldn't say, the biggest news, but certainly something that is worth discussing. GE Aerospace announced it is acquiring private company consolidated precision products for about $11.7 billion. It's one of those precision manufacturing companies owned by private equity.

You know, for a $352 billion company, that is GE Aerospace, you know, that's not a small deal, but it's not necessarily big either. Management claims it'll be about earnings per share are creative in year one. We'll see, you know, but, you know, I think more than anything, this is a strategic move. Consolidated Precision Products is one of four major component manufacturers in this industry, kind of building like jet turbine blades and things like that. So I guess my question is, Travis, when you looked at this deal, what was your knee jerk reaction here? I think it makes a ton of strength sense strategically, especially if this is one of your bottlenecks.

You see growth and demand that you can maybe meet if the supplier would just supply you with a little bit more stuff when you need it. So from that sense, I think it makes a lot of sense. The price is a little bit wild when you look at the industrial space and energy. Typically, these companies aren't going for 26 times EBITDA, which is what this deal was for. They said it's going to be less than that after things like synergies. And to your point about it's going to be EPS accretive. Well, it's going to be accretive because they're using cash on the balance sheet and debt to be able to fund it. So if you're not issuing shares, I don't think it probably would be all that accretive if they were just buying it with stock.

But, you know, that's going to lever up the balance sheet. So pulling $7 billion in cash off the balance sheet, going to add a little bit more debt. you know, it just makes the company a little bit more risky. So strategically probably makes a lot of sense. Financially, strictly, is it going to be that big a deal? Probably not. Right. 26 times EBITA, but GE is trading, but, you know, 28 times EBITO on an enterprise value basis. So certainly they're not using that stock. They're not using that currency, but valuations are crazy high right now across the board. And I think this is GE saying that they think that that level is sustainable, even if it's not going up from here. So I think, yeah, it's unreasonable

historically, but I think maybe a little more reasonable given the players today and the opportunity GECs. The interesting thing to me, and we talked about the money aspect of it, and, you know, from a financial, I don't think we're going to see like a huge bump in earnings per share from this one. Like you said, it's a critical component. They're probably paying out the nose to get it because, as I said, precision products is one of, like, the four manufacturers of these particular types of things. So keeping that in mind, like, there are other companies in these industry. We've got Pratt & Whitney over at RTX, other or Rolls-Royce, anybody else who's building jet engines

and other, and that's just one of many examples in the aerospace and defense industry, where these are critical components are being bought. So I'm thinking of it in almost like a sense of like the winners and looters here because if GE Aerospace is taking all of this in-house, I would assume that they're not doing it so they can sell to other people, right? So who's going to win and lose in the industry as a result of this kind of integrating a major component manufacturer? So as you say, this is basically vertical integration. CPP has been working with GE for more than 15 years now, mostly on the airfoil. That's the blades of the jet engine. And they are maybe the third largest supplier of their kind of group of companies to GE.

So they are by far not the biggest, but what they do, they do well. So what does this do for GE? There's some cost savings for bringing in-house, yes, but mostly we're not talking about cost savings here. You get headed a line on procurement. You move quicker on ramping up. And it also should help them by bringing in sort of this key supplier in-house as you design new engines. This is kind of a threat to the other, to the kind of CPP's competitors. I don't think that that really matters.

So now I saw Halmet, which is kind of the public company you can look at as a competitor here was down 7, 8%. I think that's an overreaction. Right now, Howmet is a bigger supplier to GE. Over time, maybe they try and move some in-house. But you're talking five years out or so, I think, before you see any movement there. And as you say, CPP, it's awkward on the other side, too. They do work for Honeywell.

They do work for Pratt and Whitney. There could be new opportunities for Halmette and other rivals if CPP is brought in house to kind of offset any lost business that they might have at GE. Yeah. And really the way to think about this is the value of vertical integration versus the value of modularization or having a horizontal business model. So right now, GE is saying, hey, we value being able to pull this in-house and be able to have have this supplier only supply us,

maybe make our next generation products a little bit better, like Lou said. But over time, these things typically go back and forth. You spin off one of your suppliers. Detroit has done this with basically every one of their suppliers. So they're just assembling pieces at this point. Because eventually you get to the point where, hey, we've got enough capacity and we're really good at making these parts. Why don't we sell them not only to ourselves, but to somebody else?

And so that's where I don't think this is necessarily going to fundamentally change the industry. Like Lou said, if you get discounts with some of these other competitors, that could maybe be a buying opportunity. I just think, you know, they're seeing so much demand in this space in general that the multiples are just extremely high. And there's a lot of optimism already priced into the market for basically everybody in the space. To that point of the integration, consolidation, disintegration, I guess if you will, of supply chains and outsourcing and all of that, It seems like the, I would call it like the 30-year wave of spinoffs and lean manufacturing and supply chain management. I don't want to say it's completely come to an end, but it really does feel like we are moving

back towards the consolidation vertical integration. We saw it with Spirit Aerosystems with Boeing requiring that. And again, we've got this deal. There's been more and more talks of, you know, not just necessarily on a company basis, but also like on a country basis where you're trying to secure your own. own supply chains in certain critical infrastructure, critical minerals and things like that. Obviously, we've seen this in industries like aerospace and defense. And so my question is, is this an actual trend across all business?

Or is this maybe just isolated to these, I would say, more critical sort of industries where maybe governments might be pushing on the thumb a little bit, be like, hey, can you bring more of this in-house so that we don't have to worry about trying to acquire from someone and we don't necessarily like. I think it is a trend across all industries, and I think it's a pendulum. I don't think the pendulum ever stops. I'm glad you mentioned spirit aerosystems,

because I think that's such an illustrative case. Boeing basically assembled spirit aerosystems using M&A, and by the end of it, spirit was basically making the airframe, the actual plane. They would just make them in Wichita, put them on a train, and then take the whole airframe out to Seattle for to add the engines and the electronics.

Boeing spun that off because they didn't want to be in that business anymore and then bought it back basically when Spirit didn't have, they squeezed the margin so bad Boeing did because it was independent. Spirit didn't have the capital to scale when Boeing wanted to ramp up production, so they had to bring it in-house. You've had this ying-yang forever. I think that's how this works. There is attractiveness to bringing it in-house.

You deal with that for a while. you realize, wait, we can create more value selling all this goodness outside of what we're doing. So you spin it out. And then you become a control freak over time. So it's that tug of war between kind of controlling things and maximizing the monetization of it. Those are always in conflict. And it seems to just go in cycles the way how the way manufacturers deal with that conflict. And the big takeaway here may just be, this is why the investment bankers always win, because they make money every time these deals are spun off or put back together, they're collecting a big check.

So I guess the takeaway of a lesson is always find a way to be the house instead of trying to bet for it and get away. All right, coming up after the break, we're going to talk about cybersecurity and how it's changing the game in a lot of different industries. Last month, medical device manufacturer Boston Scientific announced that it had been a target of a hack, disrupted some of its manufacturing and its distribution network. You know, some of its manufacturing lines actually were. running on software that got hacked and couldn't be, you know, used. These days, this is kind of a run

in the middle disclosure, one of those like Friday afternoon, bury it in 8K, nobody cares. But what makes this one a little bit more unique is that the company announced today that it won't be able to meet its quarterly annual and annual sales targets as a result of this hack as they're trying to get their systems back up online and it's been over a month. According to Reuters, this is the 29th major cyber attack on a company in 2026. And some of the most notable ones are in health care medical devices in the pharmaceutical industry. I think the big newsworthy one was Novo Nordisks, where it had several patient data, as well as its drug discovery software, were hacked and basically sold on the dark web. Travis, I want to start with you, is this just kind of table stakes

for all businesses these days where they have to deal with this in like, yeah, we'll pay the ransom or will, you know, try to shore up our systems. I'm trying to figure out, like, how investors or how businesses can operate in a way where maybe like once every couple of years, you might be the victim of a hack that can bring your entire company to a grinding hall. It is kind of a crazy place to be. And one of the things that I've been thinking about with these is you just go through this list of companies.

This is not what they do. I mean, Boston Scientific is not a cybersecurity company. So they're going to offload that to somebody else. And the other thing that just comes to mind, think about the headlines with all these AI companies, right? Open AI hacking into Hugging Face. These are companies that should know exactly what to do when it comes to cybersecurity. And they don't even have it all together. So how weak are the companies whose core business is doing something else,

creating a medical device that's going to save somebody's life and they're not spending the CEO and management team is not spending 24-7 thinking about, boy, how could hackers get into our system? I just continue to think AI is going to make this much easier. You know, we can go back to, you can almost any public company, you can see some sort of disclosure of cyber hacking. I remember, you know, 2023. It was MGM Resorts is one of the companies I follow. That's not a company you think of as a cyber company at all or even a big tech leader.

But they're having to deal with this. And if this is going to become more common with AI, guess what? We're going to spend more money using AI to defend this. And it's all just kind of a virtuous cycle of AI spending that doesn't actually add any value to anybody. So the takeaway is just buy Crowdstrike. Is that it? I think probably, yeah.

Yeah. You know, as an investor, I don't know what to think of this because it feels like Boston Scientific, they'll get through it, right? This ruins their year, but not their business. So it should be, stocks down 30% in recent months since they first started disclosing this. It feels like a buying opportunity, if you like this company, because you get a temporary thing causing a real movement on stock. But if this is table stakes and they're no good at it and there's tons of expenses that

are going to come to kind of fortify and continue to apply, is this not a buying opportunity because it's just your costs go up indefinitely from here and it only gets worse and scarier. So I mean, it's kind of an open question to you guys. I don't know what to think. It feels like both a risk we know about and a wild card that could get a lot worse from here, which is kind of a tough thing to jump into as an investor. This is actually, as we were thinking through this pre-production and discussing this here, one of the things that really stuck out to me the most, if you look at the companies on the

list, like I said, it was a lot of health care companies. It was a lot of like financial markets companies and even starting to get in some critical infrastructure, electric utilities and things like that. It seems to be a lot of those companies where they hold a lot of credit. critical information, but may not necessarily be as up to date with their, you know, cybersecurity systems or anything like that or understanding their vulnerabilities as well. And I kind of think it was the question I wanted to get to both of you guys is these particular industries is I think where this is going to be the biggest focus, critical information,

critical infrastructure, but not necessarily the know-how to handle it. Does that change the investment thesis at all because as to lose point, if these companies every two or three years are going to be, you know, completely disrupted and be like, well, I guess we're out for three months until we figure this out. Are they as viable or as, well, not, they'll be viable businesses, but are they great investable businesses for stock investors? Maybe the question is, is their pricing power above and beyond this? I mean, a utility, they, depending on the kind of utility, you're looking at. at they're going to have regulated returns. So if they say, you know what, we've got to spend a billion dollars to upgrade our system so that we don't get hacked, they're going to go to the regulator and say, hey, if we don't do

this, people are going to lose their power? And they're going to get that covered. Boston Scientific, are they going to be able to raise prices if they have to spend a whole bunch of money updating their system? Probably not. So I think that is the thing for all of us to think about is what are the added costs that we're going to have from cybersecurity, from, you know, bringing some of these tools. in-house or maybe you have to go into the cloud where that's what they specialize in.

It seems like there's going to be a lot of moving parts here and a lot of expenses that a lot of these companies weren't necessarily anticipating coming into the last couple of years. Yeah, I agree. It feels like it has to get solved. It feels like this is one of those things that it's kind of just are, I don't even call it ignorance because it's just the unknown right now. This is a new world and we have to figure out this new world. Then eventually we'll figure it out.

But I, like I said, just on this false scientific, I hate to really lean in here, not knowing how you solve this and not really feeling good. If they say, trust me, guys, we figured this out. It won't happen again. I kind of like to see proof over time on that, not just take another word after what's happened, right? So I think it's a real tough situation to navigate, at least in the near term. Back to that integration versus deconsolidation. It sounds like one of the solutions maybe.

Hey, maybe we're not doing anything on the cloud anymore, and we're all going back to on-premises enterprise-style servers and things like that. IBM, there we go. Yeah, everything that is old is new again. Coming after the break, we're going to hit the mill bag. Hey, everyone, just a quick reminder. If you want to get an email into us, email us at Podcast.Fool.com. It's a podcast with an S.

We've also left an email in the show description for you. Today's question comes from Joe in Phoenixville. This question is, hey, fellow fools. Curious to hear your thoughts on reverse stock splits for the purpose of avoiding a D-list. Is this ever happened to a stock you were long on? Did you hold and how did it turn out? Appreciate the show and love listening every day. So just let's kind of set the table here because everybody understands like avoiding a D-list, reverse

stocks, but Lou, what exactly is he talking about here just so everyone else is up to speed that's listening? And has it happened to you and how to turn it? Now, the major exchanges require each stock to maintain a minimum bid price of $1. And so that means that the stock basically has to trade above a dollar. If it's below a dollar for 30 days, the delisting process can begin, which means you kind of lose that beachfront real estate, which is a NASDAQ listing or a New York Stock Exchange listing going off to the pink sheets, going off elsewhere. So you really want to keep that beachfront property. you could just, you know, get investors excited to bid up the stock. But the other way of doing it is is that if you have fewer shares, and we always talk about

it's just slicing the pie in different ways, if you have fewer shares, each share is going to be worth more so you can kind of artificially get your stock back above a dollar. Now, if anything about this is appealing as an investor, you haven't really been listening, right? Because what we're talking about is companies that can't excite investors enough for them to bid the stock over a dollar, trying to basically manufacture that. It has happened to me. It's usually a red flag. I will note that there are some examples where it's worked out for investors, but yes, it's happened to me. No, in fact, I still own one of them and it's back down below a dollar now. And so it's usually a short-term fix. The long-term fix is do better at business.

And that can be really, really hard to do. Not generally the most bullish. thing. I think that would be the way to put it. There's a reason that penny stocks are kind of their own little corner of the market. You don't want to be a penny stock if you're a legit public company. While you were talking, I just went through and I had Gemini. So if there's any mistakes here, you can blame AI, go through some of the notable stock splits over the past five years, beyond meat, we work, Nicola Corporation, not necessarily.

It's a real murderers row of great companies there. Yeah, not necessarily the great long-term investment. So, you know, I think if you invest long enough, if you have a diversified portfolio, you will go through this eventually. I have held through it. I have held through it essentially to zero, you know, hoping for some sort of turnaround, you know, maybe getting a few shekels back, but major losses. But generally, it's not something that you want to go through.

And it can often be a downward spiral. I mean, this is one of the challenges as a public company is, If part of your business model is raising capital and is predicated on being a public company that can access public markets, if your stock starts to go down, it goes through that dollar mark. You start doing reverse splits. It can be a real challenge for a company being viable long term. I think with just those names that we talked about, you can kind of see that in practice. Real quick, let's do the glass half full because we've got to get the, so you're saying there's a chance meme, right?

Okay, it doesn't always, I got one example at least. 2003, priceline.com, the Bill Shatner ads weren't good enough after the dot-com crash. They were down below a dollar. They did a one for six reverse split to get the stock price up and to just keep treading water. Price line, of course, bought booking, changed its name. They've honestly, ironically, they've done splits the other way now because the stock went up too much. That below $1 share is now worth over. $4,000 just back in the envelope real quick. So it can work if you have a good business to buy

the time, but that is the exception. And not saying that was necessarily a good business at the time. That's no. It's the other challenge. There was a happy end in one way or the other. Yeah. Yeah, I feel like you picked the one example where it worked out incredibly well, while the rest of it's a bunch of Greek dry bulk shipping companies that have done seven reverse stock reverse mergers or reverse stock splits in the past like 10 years. So I feel like for the most part, you're treading in pretty dirty water here when you're going into the reverse stock split territory. I don't think I've seen a lot of my own examples working out.

As always, people on the program may have interest in the stocks they talk about and the Potley Fool may have formal recommendations for or against. So don't buy ourselves stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and it's not approved by advertisers. Advertisements or sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks for producer to Dan Boyd and the rest of the Molly Fool team for Lou, Travis, and myself. Thanks for listening and we'll chat again soon.