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Bear of the Day: Spirit AeroSystems (SPR)

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In today’s Bull of the Day, a company that looked like it was facing headwinds not too long ago has entirely turned things around and even received a boost from the significant changes in consumer behavior that have occurred because of the outbreak of Covid-19.

Unfortunately, there are also companies who are suffering – often through no fault of their own – because of current events.

Spirit AeroSystems (SPR - Free Report) is one of the less fortunate these days.

Though its sometimes confused with the discount airline with a similar name - Spirit Airlines (SAVE - Free Report) – Spirit AeroSystems has a much different role in the industry, as a manufacturer of aircraft components, they’ve been mostly insulated from the ups and downs of the business of carrying passengers, fuel prices and all the other vagaries that make the airline carriers a complicated investment.

Spirit manufactures the fuselage and wing components, primarily to Boeing (BA - Free Report) , but also to competitor Airbus as well as defense contractor Northrop Grumman (NOC - Free Report) , Bell Helicopter, Sikorsky – owned by Lockheed Martin (LMT - Free Report) – and several other manufacturers.

SPR began life as a public company as a spinoff of a Boeing division and though they are now completely separate entities, Boeing remains Spirit’s most important customer. Supplying an estimated 70% of the external structure of Boeing’s 737 aircraft, SPR generated more than 50% of revenues from Boeing prior to 2019.

Then trouble hit, and it was a 1-2 combination.

First, Boeing’s most popular and profitable product – the 737 MAX – was grounded around the globe after two fatal crashes that were believed to be the result of a malfunction of flight control systems that had nothing to do with the structural components supplied by Spirit.

Then, just when it appeared that reengineered versions of the MAX were ready to be certified for passenger trips by the FAA, Covid-19 hit and brought on significant restrictions on air travel, a massive reduction in business trips and a general sense of apprehension on the part of potential tourists.

During the second quarter of 2020, more than 16,000 planes were parked worldwide as flight bookings fell off by as much as 95%. Obviously, when major airlines are dealing with the logistical nightmare of storing so many aircraft because of lack of demand for ai travel, they’re not in any hurry to increase their orders for new planes.

Spirit AeroSystems has been rapidly instituting austerity measures in order to survive the cash crunch inflicted by the slowdown in aircraft manufacturing, but the effects of the slowdown have already taken a major toll.

2020 revenues are expected to be down by 58% and 2021 is nearly the same. The long term nature of investments in the industry can serve to smooth out fluctuations, but it also means that losses aren’t generally recovered quickly.

As the commercial aviation outlook becomes clearer, full-year earnings estimates for Spirit AeroSystems have taken a nosedive, falling from a loss of ($2.65)/share just 30 days ago to ($4.07)/share today. SPR is currently a Zacks Rank #5 (Strong Sell).

SPR shares are already off more than 80% from all-time highs, but there’s no indication that there’s any relief in sight. This company has an enormous amount of value for customers and investors alike during normal times, but when those sanguine conditions might return is anybody’s guess.

In the meantime, SPR probably represents too much risk for the average retail investor.

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