SPR

Publicly traded companies mentioned herein: Airbus Group SE (AIR FP), Boeing Co (BA), Bombardier Inc (BBD/B CN), Spirit AeroSystems Holdings Inc (SPR)

Highlights

The presenter is long shares of Spirit AeroSystems Holdings Inc (SPR), the company he thinks will benefit most from a recovery in the aerospace sector, while also being underappreciated by investors. SPR is one of the world’s largest tier-one manufacturers of aerostructures. He has observed a narrative among investors that SPR is untouchable and low quality for a few legacy reasons: high exposure to 737 MAX, a business that is leveraged more toward OE vs. the aftermarket, and its customer concentration with BA. COVID-19 has also had a negative impact on the company’s balance sheet (i.e., the company had a lot of debt, was burning cash, and investors weren’t sure if it would survive). The presenter feels that the timing is right as all of these negatives are beginning to inflect. The 737 MAX is on track to be recertified, the development of a vaccine should cause delivery rates to recover, and SPR’s heavy exposure toward the 737 MAX is now a positive on the back of COVID-19. In 2023, he is conservatively modeling no change in the delivery rate for wide bodies. For narrow bodies, he believes delivery rates will move back into the low-40%s. This is well below the mid-50%s - low-60%s they were prior to COVID-19, but based on these delivery rates and segment margins returning to 13% - 14%, he estimates that SPR should be able to generate $4.00 FCF/share by 2023. Management has guided to 16.5% segment margins at those delivery rates. Applying a 15x multiple to that $4.00 FCF/share gets him to a price target of ~$60/share, which represents 100% upside to the stock’s current ~$30/share price. Using management’s guidance for 16.5% segment margins equates to $5.25 in FCF/share and is one of the steps needed to potentially get to $6.00 FCF/share, and a higher price target.