High Growth Potential for Spirit Aero Systems
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It seems appropriate to take a look at Spirit Aero Systems Holdings (NYSE: SPR) in the wake of the first anniversary of SEAL Team Six eliminating the worst terrorist ever. While these highly skilled operators were able to breach Pakistani air space, execute their mission and return without detection, one of the stealth helicopter used on the mission was left behind. It is believed that the aircraft clipped a fence or perimeter wall and had to be detonated before the SEALS were extracted. While the specifics of that helicopter will remain classified for at least the next fifty years, including the specific manufacturer, Spirit Aero Systems is involved in this business and may have contributed to the mission in some way. It is worth noting that the stealth capabilities of the helicopters worked flawlessly.
Regardless of the whether or not the company can be tied to the long overdue execution, the stock is attractive at current levels. Additionally, given the recent success of U.S. military Special Forces, not only in terms of operational success, but in terms of public opinion, those companies that hold critical government contracts are likely to enjoy stable business into the future. This expectation would only be bolstered by further economic crisis as the government will need to protect its interests abroad.
The Earnings Catalyst
Spirit Aero announced earnings last week that came in two cents above consensus expectations. The company had revenues of $1.27 billion compared to the expectation of $1.25 billion. Additionally, the company saw a 21% year-over-year grow in sales from $1.05 billion recorded for the same quarter a year ago. The positive news led to a spike in the stock’s price, allowing the stock to close at a 52-week high within the previous week. This raises the question of whether the stock has made its move, and might be better to monitor rather than purchase.
An additional concern for Spirit Aero is the impact that a recent tornado had on its Wichita, KS location. The storm caused significant damage and disrupted operations for several days. The disruption has not been fully reflected into projections and may prove negative. Furthermore, a significant portion of the company’s positive results came from its contracts with Boeing (NYSE: BA). Spirit Aero is involved in Boeing’s 787 and 737 production and has benefitted from each. Any potential slowdown at Boeing, or even the expectation of slower sales, also has the potential to act as a negative for the stock. See below for a more in-depth look at the Boeing angle.
Despite these concerns, the company has significant exposure to China that is projected to yield positive growth results. One of the company’s real strengths is its growth prospects. The company has year-over-year quarterly revenue growth of 20.6% relative to 6.3% for Lockheed Martin, -8.0% for Northrop Grumman and -1.9% for Raytheon. This growth figure results in a very attractive price-to-earnings over growth (PEG) ratio of 0.98. A reading under 1.0 is considered attractive. Lockheed has a PEG of 1.84, Northrop has a PEG of -6.6 and Raytheon has a PEG of 1.2. If one were to only consider the valuation of these companies using the trailing twelve month price-to-earnings (P/E) ratio, the growth aspect would be lost. Spirit Aero has a P/E of 15.5 relative to 10.5 for Lockheed, 8 for Northrop and 9.8 for Raytheon. The real value of Spirit Aero is in its potential for growth.
When the catalyst provided by a positive earnings report is put into the context of the company’s strong growth profile, the stock is attractive on any pullbacks. In the overall context of the short-term and longer-term prospects, there is an argument for the stock below $26, but above $24.50. If, however, the stock runs beyond $26.50, there is the potential that the price may run even higher still.
The 787 Is Helping Spirit Aero to Take Flight
Just when analysts, investors and the practitioners of black magic all had decided that there were no more curses that could impact the production of the 787, the above-mentioned tornado came along.
The good news for Spirit Aero, which manufactures the nose section of the 787, is that the experts do not think that the impact will be severe. Perhaps the airplane gods wanted to be sure proper homage was paid before letting this aircraft take flight. When it does, it promises to be a huge step for both companies and for airplanes in general. Boeing’s position seems to also be improving as rumors that it has pulled ahead in a bid for 200 planes by United Continental. Winning the bid will help solidify the near-term future for both companies. Anyone who owns either one should be monitoring this news item.
This highlights another important feature of this company. It has made itself an indispensable part of the supply change for many of the largest aircraft manufacturers in the world. This simple fact helps to make the company’s future secure. Unless one believe that the entire airline industry is going to disappear, Spirit Aero should be safe. With that in mind, there can be no argument that the airline industry is not rocky, unpredictable and poorly run. But when the two-tiered revenue structure for this company is considered – both the commercial and the military aspects – it looks like an attractive holding, both aggressively and defensively.
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