Shares of airplane parts-maker Spirit AeroSystems Holdings (SPR 4.44%) tumbled nearly 10% in Friday trading before closing the day down 8.8%. Spirit had just reported fourth-quarter earnings that showed revenue rising 9% year over year (to $1.7 billion), and earnings rising twice as fast -- up 20% to $1.07 per share.
Those numbers beat analyst estimates. Wall Street had predicted only $1.65 billion in Q4 sales, and "adjusted" profits of $1.22 per share (Spirit said its "adjusted" profit was $1.32).
For the full fiscal year 2017, Spirit's profits declined 19% to $3.01 per share. Full-year sales grew 3% to just short of $7 billion -- but again, still beat estimates.
So what was it that had Wall Street upset with Spirit today? It couldn't have been guidance, could it? After all, Spirit followed up on its estimates-beating performance in 2017 by promising investors sales of between $7.1 billion and $7.2 billion in 2018 (Wall Street has been predicting only the lower figure), and per-share profits between $6.25 and $6.50 (Wall Street's estimate: $5.85).
And yet, it appears it was guidance that caused investors to throw a hissy fit. After running through the GAAP numbers, management further forecast that it will generate somewhere from $550 million to $600 million in free cash flow this year. Problem is, according to Reuters, Wall Street had been looking for even more cash -- $612 million to be precise. In Reuters' estimation, this gap between what Wall Street wanted to hear and what Spirit actually said is what set Spirit shares tumbling.
Now, a mere $12 million difference between forecast free cash flow and management's promise to produce same seems a pretty minor excuse for selling off Spirit stock. But here's the thing: At the midpoint of Spirit's guidance, $575 million of free cash flow divided into Spirit's $10.8 billion market capitalization yields a valuation of 18.9 times FCF on the stock. On the other hand, if Spirit were to produce the $612 million in free cash flow that Wall Street was expecting, its valuation would still be 17.7 times FCF.
Either way, these seem pricey valuations to pay for a stock that most analysts agree will only grow its profits at about 11% annually over the next five years. Whatever the actual reason for Spirit shares selling off today, selling Spirit appears to be the right call.