Is Spirit AeroSystems Holdings, Inc. Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Spirit AeroSystems Holdings  (NYSE: SPR  )  fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Spirit AeroSystems' story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Spirit AeroSystems' key statistics:

SPR Total Return Price Chart

SPR Total Return Price data. Source: YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

49.5%

Pass

Improving profit margin

(285%)

Fail

Free cash flow growth > Net income growth

168.9% vs. (377%)

Pass

Improving EPS

(379%)

Fail

Stock growth (+ 15%) < EPS growth

18.5% vs. (379%)

Fail

Source: YCharts. * Period begins at end of Q1 2011.

SPR Return on Equity (TTM) Chart

SPR Return on Equity (TTM) data. Source: YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(369%)

Fail

Declining debt to equity

17%

Fail

Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
Spirit AeroSystems' score has worsened since we first examined it last year, and it's now racked up a mere two out of seven possible passing grades. Spirit's shareholders ought to be concerned with the plunge in net income, which has gotten even worse since last year. The company's swelling debts also cost it a failing grade this year. Will Spirit AeroSystems be able to turn these sliding metrics around and take off in this period of purportedly strong growth for the commercial aerospace industry? Let's dig a little deeper to find out.

Spirit AeroSystems' fourth-quarter earnings results weren't too impressive as the aerospace supplier suffered a huge net loss of $587 million, primarily due to charges pertaining to its supply agreement with Boeing  (NYSE: BA  )  for the 787 Dreamliner. In addition, the company announced lackluster forward full-year earnings guidance for fiscal 2014, which left investors skeptical. The company reversed some of this disappointment with last week's first-quarter earnings release, but its guidance remains the same despite showing a much better picture on the bottom line. CEO Larry Lawson foresees sustainable performance thanks to cost-cutting initiatives implemented this year, which should help Spirit to improve its somewhat erratic free cash flow. Last year, it laid off nearly 360 workers at its Kansas and Oklahoma facilities and 150 employees at its Wichita plant to reduce overhead.

Industrial specialist Daniel Miller notes that Spirit AeroSystems should see substantial benefits from increasing production rates for Boeing often problematic 787 Dreamliner. Boeing has suffered embarrassing mechanical problems on multiple occasions with its next-gen jet, including a fleetwide three-month grounding after the lithium-ion batteries in two Dreamliners burned out in early 2013. However, the Federal Aviation Administration recently proclaimed the Dreamliner now meets required levels of design safety, which should bring some potential new orders from skittish airline operators around the world. With a current backlog of more than 900 Dreamliners, Boeing now hopes to produce 12 per month by 2016, and 14 planes per month by 2020, which should be a big boost to Sprit's top-line growth. However, impending pricing discussions between Boeing and Spirit might put additional cost pressures on the beleaguered aerospace supplier.

Over the coming years, Spirit should also benefit from strong growth in single-aisle commercial airplane sales, which has been the company's highest-margin business for a long time. Spirit also intends to sell its half stake in Progresstech, a joint venture between Spirit and a group of Russian aerospace companies, which should bring in a nice chunk of cash to support its need for capital spending to meet rising demand for airplane parts.

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.

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