Spirit AeroSystems downgraded to Neutral at Goldman Sachs

Spirit AeroSystems (NYSE:SPR) on Wednesday was downgraded to Neutral from a previous investment rating of Buy by analysts at financial-services company Goldman Sachs. They said profits and cash flow at the maker of airplane parts were “worse than we thought.”

“It is not entirely clear to us why profitability is proving much tougher at Spirit (SPR) than at others in the sector; but labor, cost inflation, supply chain and product quality are adding up to substantially eat into unit economics,” Noah Poponak, analyst at Goldman Sachs, said in an August 2 report. “Our visibility into medium-term financials is now also very low, and we recommend investing in aerospace through other names.”

The bank’s downgrade followed Spirit’s (SPR) Q2 earnings report that revealed higher costs to make fuselages for Boeing (NYSE:BA) and Airbus (OTCPK:EADSY) (OTCPK:EADSF). Spirit’s stock on Wednesday fell 27%, the most in 11 years, after the company disclosed its higher cash burn.

As a supplier to Boeing (BA) and Airbus (OTCPK:EADSY) (OTCPK:EADSF), Spirit (SPR) is among the companies in the aviation industry that are working to boost output amid a surge in demand for air travel after the end of the coronavirus pandemic.

Spirit’s (SPR) second quarter was marked by a work stoppage as union members negotiated a new labor contract and the discovery of a manufacturing defect in the tail fins made for Boeing’s (BA) 737 Max jet.

Boeing (BA) has aimed to boost monthly output of the best-selling plane amid supply-chain constraints. The 737 program is ramping up production to 38 planes a month, and plans to reach 50 a month by 2025-26, the company said last month.

“While Spirit (SPR) faced labor negotiation and vertical tail fin rework disruptions in 2Q, it is surprising to us that management is pointing to break-even core free cash flow in the back half while breaking to 42-a-month on the 737 Max,” according to Goldman Sachs. “Management also pointed to relatively limited free cash flow in 2024 and 2025 as it burns off the forward losses it has now built across several programs, faces higher labor costs, continues to see supply chain disruption and builds inventory for the production rate ramp.”

Goldman Sachs cut its price target for Spirit (SPR) to $30 a share from $45 a share, which assumes a 10% free cash flow yield on estimated free cash flow per share of $3.28 for 2025, discounted back one year at 8%. Its prior methodology used a 7% target free-cash-flow yield on estimates for 2024.

The bank said Spirit’s (SPR) current valuation is “very inexpensive” compared to its financial performance before the pandemic crimped demand for planes and two deadly crashes of the 737 Max led aviation officials worldwide to ground the plane while they investigated its flight safety.

The lower valuation “could mean substantial upside in the equity were it to recover something near historical unit economics (which included challenged programs),” Goldman Sachs said. “However, if unit economics have eroded for the long term, the historical earnings power will not be relevant.”

Goldman Sachs estimates for Spirit AeroSystems (SPR), August 2
	Earnings (Loss) Per Share
	New		Old
2023E	-$4.14		-$1.95
2024E	$2.00		$3.18
2025E	$3.36		$5.34
	Revenue (mln)
	New		Old
2023E	$6,205.3		$6,337.4
2024E	$7,843.8		$7,823.1
2025E	$8,776.4		$8,223.9