Will Spirit Aerosystems Stock Recover Anytime Soon?

We believe there may be better places for your money than Spirit Aerosystems stock (NYSE: SPR) at the present time. SPR trades at $19 currently and it has lost 72% in value this year. The stock has not gained much since March due to tepid air travel demand and a slow production rate of Boeing 737 MAX. Spirit Aerosystems manufactures fuselage systems, propulsion systems, and wing systems for Boeing and Airbus. Due to ongoing order deferrals by airlines, the demand for new aircraft is expected to remain subdued for a prolonged period. While the company has taken a slew of measures including facility closures, 90% reduction in dividend, and employee furloughs, the high operating expenses will continue to weigh on shareholder returns until air travel demand recovers. However, given Spirit Aerosystems’ stock performance during the current crisis with that during the 2008 recession there is a sizable upside if MAX gets approval and Boeing kickstarts its production. Notably, the 737 MAX order accounts for 60% of Spirit Aerosystems’ $42.5 billion total backlog.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 51% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how SPR and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Spirit Aerosystems vs S&P 500 Performance Over 2007-08 Financial Crisis

SPR stock declined from levels of around $38 in September 2007 (pre-crisis peak) to levels of around $10 in March 2009 (as the markets bottomed out), implying SPR stock lost 74% from its approximate pre-crisis peak. It recovered post the 2008 crisis to levels of about $21 in early 2010 – rising by 110% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.

In Recent Years, Spirit Aerosystems has been growing at a moderate pace

Spirit Aerosystems’ Revenues grew by 20% from $6.6 billion in 2015 to $7.9 billion in 2019, driven by expanding air travel market and fleet replacement targets of airlines. Despite moderate revenue growth, the company’s net margins have remained within the single-digit range, resulting in relatively flat earnings per share. Due to the grounding of MAX aircraft and low production rate at Boeing’s factories, Spirit Aerosystems’ Q2 2020 revenues were 68% below the level seen a year ago, and the EPS figure for the quarter sliding from $1.71 in Q2 2019 to ($2.28) in Q2 2020.

Does Spirit Aerosystems Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Spirit Aerosystems’ total debt increased from $1.1 billion in 2016 to $3 billion at the end of Q2 2020, while its total cash increased from $700 million to $2 billion over the same period. Operating cash outflow for the first six months was $560 million but, a bulk of the company’s long-term debt matures after 2023 – indicating a healthy cash position to weather the crisis.

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy market sentiment

Spirit Aerosystems’ stock recovered strongly after the 2008 crisis but continued weakness in air travel demand and a delay in MAX certification process is expected to weigh on the stock in 2020.

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