Today, Morgan Stanley released a detailed performance review of Spirit AeroSystems Holdings, Inc. (NYSE:SPR). The sell-side firm noted that the company posted eventful and supportive second quarter of fiscal 2016 (2QFY16) earnings. It not only beat consensus estimates, but also raised its full-year guidance. Furthermore, it also obtained clarity on the outstanding Airbus contract. On the other hand, discussions with Boeing are also on the table. Considering all these factors, the research firm reiterated its Overweight rating on SPR stock with a price target of $56.
Spirit AeroSystems’ Performance Review
Yesterday, the aerospace parts manufacturer announced its 2QFY16. The company topped consensus with $1.83 billion revenue against analysts' expectations of $1.685 billion. Furthermore, its earnings per share (EPS) of $1.213 also outshined Street’s $1.059 projections. Strong results were attributed to higher production deliveries of A350 XWB and A320 parts to Airbus Group SE (OTCMKTS:EADSY), claim settlements, and an increased global customer support and service.
By the end of 2Q, the company had around $47 billion worth of backlog. It includes around 12,500 aircraft work from Boeing Co (NYSE:BA) and Airbus. Additionally, it had $161 million free cash flow by the quarter end.
Long-term Contract with Airbus
In the earnings call, President and CEO Tom Gentile disclosed that he entered into a long-term pricing agreement with Airbus on its A350 XWB program. As a result, the company recorded $135.7 million forward loss in its 2Q financial statement; however, the block was extended from 400 to 800 shipsets.
Market pundits believe that the company’s earnings from Airbus’s A350 will turn positive in FY17, and it will recover around $450 million cash flow from the remaining 700 shipsets that are yet to be delivered. Furthermore, the new agreement could pave way for an incremental growth from Airbus, as Spirit AeroSystems is actively bidding on new work programs providing additional growth and diversification.
Negotiations with Boeing Continued
As the clouds related to Airbus orders are settled, the management is now working towards the resolution of Boeing’s contract over pricing issue. The team is on the negotiation table under the supervision of its new CEO Mr. Gentile. It is quite possible that both the parties conclude an agreement within this year.
Some investors are concerned that these negotiations might result in Spirit AeroSystems’ long-term margin and profit dilution; however, Morgan Stanley’s research analysts do not expect onerous terms on the new contract, given its position has improved materially from the last time around, favorable interim agreements, and the recent Airbus resolution that shows an ability to execute. These analysts further concrete their argument with the statement that the company was clear to point out the next 787 block, which is likely to begin in 2HFY16; will have conservative assumptions, limiting the downside risk to guidance. Finally, as it relates to the payment collections from Boeing and from other suppliers, the company stated that there have not been any changes to terms, which will be covered in the ongoing discussions.
Shareholders’ Returns Likely to Outpace
Spirit AeroSystems was anticipated to cease its $1.25 million per shipset worth advance payment returns in late FY17 or early FY18. This will create additional lift to the cash flow and put the company on track to reach its FCF-to-revenue target of 6-8%. This improved cash flow will ultimately increase shareholders returns.
Moreover, the company had also repurchased 3.3 million shares against $152 million in the reported quarter, which brings year-to-date (YTD) total purchase of $318 million. The management still has $332 million in hand for shares repurchases until December 2017. This will also bring upside potential in shareholders’ returns.
The company foresees its year-end revenue to remain in between $6.6-$6.7 billion. However, it increased its EPS guidance from $4.15-$4.35 to $4.30-$4.50; excluding one-time items impact of $0.86 per share. Furthermore, the company also raised its projected free cash flow outlook from $325-$375 million to $350-$400 million; including capital expenditure (capex) in the $250-$300 million range.
Research Firms’ Stance
As per Bloomberg statistics, 18 research firms covered Spirit AeroSystems. Out of these, nine firms suggested a Buy, eight firms advised a Hold, whereas only Goldman Sachs recommended Sell. The average 12-month target price from these firms was $56.58.