September 30, 2016

Spirit AeroSystems – Flying Above The Market’s Skepticism


Summary:

  • Spirit AeroSystems Holdings is trading near historical lows, as investors are concerned about the sustainability of the company’s recovery in returns since 2013.
  • The firm has stronger profitability than peers but is trading at a valuation discount to several.
  • Management’s confidence about delivery and production growth imply multiple expansion and equity upside may be warranted.

Performance and Valuation Prime™ Chart

The PVP chart below reflects the real, economic performance and valuation measures of Spirit AeroSystems Holdings, Inc. (NYSE:SPR) after making many major adjustments to the as-reported financials. This chart, along with all of the charts included in this article, as well as the detail behind the graphics, can be found here.

The goal of the PVP chart is to show the company’s cleaned up operating profitability, the company’s ability to reinvest in the business, and also how the markets are valuing the company, relative to assets and to cleaned-up earnings.

The apostrophe after ROA’, Asset’, V/A’, and V/E’ is the symbol for “prime” which means “adjusted.” These calculations have been modified with comprehensive adjustments to remove as-reported earnings, asset, liability, and cash flow statement inconsistencies and distortions. To better understand the PVP chart and the following discussion, please refer to our guide here.

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SPR had seen steady declines in profitability, with Adjusted ROA (ROA’) falling from a peak of 33% in 2006 to a low of -10% in 2013 from charges (cost overruns and underpricing of contracts) mainly tied to the Boeing 787 Dreamliner program. However, as the firm began to divest non-core assets and refocus on their core competencies, they were able to markedly improve profitability, with ROA’ reaching 14% in 2014 and 17% in 2015. Meanwhile, the firm has seen a significant decline in Asset’ growth, ranging from -12% to 6% since 2011, as part of their aforementioned strategic realignment.

Performance Drivers – Sales, Margins, and Turns

It can be helpful to break down ROA’ into its DuPont formula parts, Adjusted Earnings Margin (Earnings’ Margin) and Adjusted Asset Turnover (Asset’ Turns), which are the cleaned up margins and turns metrics used to calculate ROA’. The chart below details both Earnings’ Margin and Asset’ Turns historically, to help us better understand the drivers of the firm’s profitability and performance. The detail behind the chart can be found here.

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Valuation Matrix – ROA’ and Asset’ Growth as Drivers of Valuation

When valuing a company, it is important to consider more than a singular target price, and instead the potential value of a firm at various levels of performance. The below matrix highlights potential prices for SPR at various levels of profitability (in terms of ROA’) and growth (Asset’ growth). Prices that are in excess of 10% equity upside are highlighted in black, and prices representing an excess of 10% equity downside are highlighted in red. To see more about the below chart, and also to be able to input your own scenarios to understand how it impacts valuations, please click here.

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Click here to read the article in its entirety at Seeking Alpha, where we also discuss how SPR compares to peers, and whether SPR has equity upside or downside potential.