At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best ...
Spirit AeroSystems
FBR's call is the most bullish, so we'll focus on that one today. By its own account, FBR:
… [spent] much of 2009 ... trying to decide whether the airline operators were more worried about rising oil prices or the transitory (hopefully) downturn in passenger traffic. If the airlines were more worried about oil prices than they were about traffic, then they would be more likely to remain committed to their new aircraft orders since the newer aircraft are significantly more efficient than the aircraft that they are replacing. If the airlines were more worried about global traffic ... then they would be more willing to park part of their current aircraft fleet and defer new aircraft purchases.
Ultimately, FBR concluded that because "recent end market data continues to improve," airplane operators will start buying new airplanes from companies like Boeing
I disagree.
Let's go to the tape
I know my opinion won't be popular. Spirit is an official recommendation of our market-thumping Motley Fool Hidden Gems crew, and it stands to reason that the same folks who have beaten the S&P 500 by more than 19 percentage points over most of the past decade would be right about endorsing Spirit as well. Moreover, FBR itself has a fine record in the defense and aerospace, er, space:
|
Companies |
FBR Says: |
FBR's Picks Beating S&P By: |
|
|---|---|---|---|
|
Raytheon |
Outperform |
**** |
28 points |
|
BE Aerospace |
Outperform |
**** |
23 points (two picks) |
|
L-3 Communications |
Outperform |
***** |
6 points |
|
Lockheed Martin |
Outperform |
**** |
3 points |
A few hiccups notwithstanding -- Ceradyne
Two reasons
First, Spirit AeroSystems remains one of FBR's biggest losers. FBR's endorsement of the stock back in April 2008 cost it -- and investors who heeded FBR's advice -- 30 percentage points of market underperformance.
Second, remember why FBR delayed this year's judgment on Spirit until now? The banker wasn't sure whether airlines would buy planes from Boeing and Airbus, and consequently couldn't guess whether Spirit would do good business selling parts to the airplane makers.
Seriously, FBR? You didn't know whether Spirit's key customers, Boeing and Airbus, would be selling planes to the airlines? Here's a hint: Airbus boasts an order backlog of $437 billion -- nearly 3,500 planes waiting to be built. Meanwhile, Boeing boasts a $316 billion backlog, including 876 orders for the 787 Dreamliner alone. (Yes, some of these orders get canceled occasionally, but with 57 customers queued up and waiting, you can bet that if one customer cancels, another will eagerly take its place. Emirates Air volunteered to do just that back in November.)
Foolish takeaway
Fools, there's no question that Boeing and Airbus will sell tons of planes, nor that Spirit will provide the parts to build them. The only question here is whether, given this very predictable airplane sales growth, and analysts' expectations that Spirit itself will grow at less than 8% per year for the next five years on the back of these sales, Spirit is worth the price investors are being asked to pay today.
It's not. Not at a P/E of 14. Not with free cash flow continuing to run negative. Despite the certainty that airplanes will continue to sell, the Spirit may be willing, but the valuation is weak.
Stay away from Spirit. Buy something else instead.
