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Bear of the Day: Spirit AeroSystems (SPR)

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The problems facing aircraft manufacturer Boeing (BA) have been well-documented. The company’s best-selling and most profitable plane – the 737 MAX – has been grounded for nearly a year and even the most optimistic forecasts don’t call for a return to the skies before mid-summer 2020.

Boeing shares have declined more than 20% since hitting an all-time high of $446/share in March of 2019. The price damage likely would have been worse if the company didn’t have a multi-year backlog of orders to fill once 737 MAX deliveries start once again.

Investors have largely adopted the view that lost revenues will be recouped once the crisis is resolved.

As the grounding of the MAX drags on however, it’s not just Boeing that’s suffering from a loss of revenue. Suppliers are now forced to significantly change their plans in response to the uncertain schedule for the recertification of the airplane.

Spirit AeroSystems (SPR) manufactures the fuselage for the MAX and other Boeing planes and derives up to 85% of its annual revenues from sales to Boeing and more than 50% specifically from 737 components.

Note: Spirit AeroSystems should not be confused with Spirit Airlines (SAVE - Free Report) , a discount carrier that currently carries a Zacks Rank #1 (Strong Buy).

Spirit AeroSystems announced in December that deliveries to Boeing would cease indefinitely on January 1st, 2020. The official release explained that, “this suspension will have an adverse impact on Spirit’s business financial condition, results of operations and cash flows.” The company went on to say that more information would be included in the Q4 earnings release. That release is due this Friday, February 21st.

Management also declared they are, “evaluating all potential actions to align the cost base with the lower production levels expected in 2020." On February 7th, Spirit declared a quarterly dividend of just $0.01/share, a 91% decrease from the $0.12/share they had been paying previously. They explained that they were making the move out of an abundance of caution and in the belief that it is prudent to preserve liquidity as the situation plays out.

They also noted that there is currently a backlog of approximately 4,400 MAX aircraft.

Spirit recently acquired significant assets from smaller manufacturer Bombardier Aerostructures, and those operations are likely to cushion the revenue shortfall, but by only a small amount.

The effect on earnings estimates has been dramatic. Over the past 60 days, the Zacks Consensus Earnings Estimate for full year 2020 has been reduced from $7.21/share to just $2.23/share.

It won't surprise you that SPR is currently a Zacks Rank #5 (Strong Sell).

There is definitely a possibility that the MAX will be back in the skies this Summer and Boeing and Spirit will ramp sales back up all the way to capacity to fill the order backlog. That’s still months away and far from certain. In the meantime, there’s likely to be some turbulence.

Spirit management is doing the best they can in a bad situation, but investors would be wise to avoid Spirit AeroSystems, especially heading into the Q4 report this Friday.

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