Spirit AeroSystems Is An Uncertain Bet

by Trefis Team
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After observing the lows of $20 in February 2020, the shares of Spirit AeroSystems (NYSE: SPR) have more than doubled to $50 now largely due to the lifting of the FAA’s ban and an uptick in passenger numbers at TSA checkpoints. Comparing the company’s $745 million operating cash outflow in 2020 with the stock’s $1.4 billion drop in market capitalization, Trefis believes that SPR is a risky bet at current levels. The company designs and manufactures aerostructures including fuselage, nacelles, and wings for Boeing and Airbus. Due to the grounding of MAX, Spirit’s order backlog fell by $8.3 billion to $34.2 billion in the past year. Boeing contributes 80% of Spirit’s total revenues with MAX accounting for 54% of the order backlog. Moreover, MAX’s low production rate is likely to weigh on Spirit’s finances in the near-term despite the company’s focus to diversify its business by acquiring Bombardier’s aftermarket service and aerostructure business.  Our interactive dashboard analysis highlights Spirit AeroSystems stock performance during the current crisis with that during the 2008 recession.

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 77% 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 Stock vs S&P 500 Performance Over 2007-08 Financial Crisis

SPR stock declined from levels of around $38 in September 2007 to levels of around $10 in March 2009 (as the markets bottomed out), implying SPR stock lost 74% from its pre-crisis level. It recovered post the 2008 crisis to levels of about $20 in early 2010 – rising by 100% 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.

Spirit Aerosystems Fundamentals before the MAX crisis were stable

SPR’s Revenues grew by 13% from $7 billion in 2017 to $7.9 billion in 2019, supported by rising production volumes and order backlog. The EPS jumped by 68% from $3.04 in 2017 to $5.11 in 2019 due to lower shares outstanding and a slight improvement in net margin. In 2020, the company’s revenues observed 57% (y-o-y) contraction resulting in a net loss of $870 million as the FAA’s grounding order led to the suspension of MAX’s production.

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
  • Since late 2020:  Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment

MAX’s low production rate is likely to weigh on Spirit’s finances despite the company’s focus to diversify its business by acquiring Bombardier’s aftermarket service and aerostructure business.

The coronavirus pandemic has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for General Dynamics vs. Anthem shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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