Is Spirit AeroSystems Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Spirit AeroSystems's (NYSE: SPR  ) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Spirit's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Spirit's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Spirit's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Spirit managing its resources well? A company's return on equity should be improving, and its debt-to-equity ratio declining, if it's to earn our approval.

By the numbers
Now, let's take a look at Spirit's key statistics:

SPR Total Return Price data by YCharts.

Passing Criteria

3-Year* Change 

Grade

Revenue growth > 30%

42.3%

Pass

Improving profit margin

(218.8%)

Fail

Free cash flow growth > Net income growth

130.1% vs. (78.6%)

Pass

Improving EPS

(78.5%)

Fail

Stock growth (+ 15%) < EPS growth

(6.3%) vs. (78.5%)

Fail

Source: YCharts.
*Period begins at end of Q3 2009.

SPR Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(85.1%)

Fail

Declining debt to equity

(1%)

Pass

Source: YCharts.
*Period begins at end of Q3 2009.

How we got here and where we're going
Three out of seven possible passing grades isn't particularly impressive. Spirit fell hard in the third quarter  when it revealed large tax write-offs for several aircraft programs, which explains why the company's net income tanked in the latest quarter we looked at. The company's forward guidance  for 2013, however, comes in ahead of expectations on the bottom line, which could help turn this performance around when we examine it next.

Much of this weakness is a bit out of Spirit's hands. As the primary supplier for major components of several Boeing (NYSE: BA  ) planes, including the long-delayed 787 Dreamliner, Spirit is tied closely to the demand for these jets. Spirit handles the manufacturing of parts for several other major aircraft, as well, but none of them are as integral to Spirit as Boeing. The breakdown of Spirit's inventories, by major manufacturer, looks a bit like this :

  • Boeing: 60%
  • EADS subsidiary Airbus: 20%
  • General Dynamics (NYSE: GD  ) subsidiary Gulfstream: 19%
  • All others: 1%

Spirit's primary source of orders from Boeing is the 787, which comprises more than double the inventory buildup of any other platform -- the other two notable planes in Spirit's roster being the Airbus A350 and, interestingly, the Gulfstream G650, the inspiration for the rap song "Like a G6."

In late 2011, I calculated a potential increase in revenue from full construction capacity of the 787, and the only company that would come close to matching Spirit's reliance on the that craft's rollout was Goodrich, which supplies Boeing with a large amount of electronic components, and which was purchased by United Technologies (NYSE: UTX  ) half a year ago . Plenty of other companies have a lot riding on Boeing's timeliness -- General Electric (NYSE: GE  ) supplies the jet turbines, Honeywell (NYSE: HON  ) supplies lighting systems. Before Goodrich's acquisition, it might have been similarly positioned to Spirit, but none of the other major suppliers rise and fall on the wings of Boeing's Dreamliner.

Unfortunately, Boeing has made a hash of the 787's development and rollout. The company lost another sale to Airbus earlier this week, and with a strike on the horizon at Boeing plants, Spirit shareholders might be in for some agony for the next quarter or two.

Putting the pieces together
Today, Spirit AeroSystems has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

With great opportunity comes great responsibility. For Boeing, which operates as a major player in a multitrillion-dollar market, the opportunity is absolutely massive. However, the company's execution problems and emerging competitors have investors wondering whether Boeing will live up to its shareholder responsibilities. In this premium research report, two of the Fool's best industrial industry minds have collaborated to provide investors with the key, must know issues around Boeing. They'll be updating the report as key news hits, so make sure to claim a copy today by clicking here now.

Keep track of Spirit AeroSystems by adding it to your free stock Watchlist.


Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 10, 2013, at 2:55 AM, whsteffan wrote:

    ""primary source of orders"

    The 787????? try not to forget the 40 plus per month 737 source of orders to say nothing of the 767, 747, 777 sources of orders-- yep and even innocent little kids read the inaccurate tirade from the Fool

  • Report this Comment On January 10, 2013, at 3:23 AM, TMFBiggles wrote:

    @ whsteffan -

    If you'd read Spirit's latest 10-Q, you'd find that inventory totals for the 787 make up 60% of all orders from Boeing.

    http://www.sec.gov/Archives/edgar/data/1364885/0001104659120...

    Whose inaccurate tirade are we talking about, exactly?

    - Alex

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