Spirit AeroSystems: Is FCF Ever Going To Come? (NYSE:SPR)

Investment thesis

There was a large increase in Spirit AeroSystems (NYSE:SPR) stock price after the earnings report, which I attribute to optimistic reactions to the company’s comments about the 737 MAX production rate being higher than expected. Compared to Boeing’s (BA) current outlook of stabilizing at 31 per month, SPR anticipates the 737 MAX will reach 42 per month by FYE23. Given SPR’s current operating performance, which has worsened in the quarter, I think the optimism may be premature. With the 737 MAX’s breakeven point having increased since the last delivery forecast, this is especially true. When SPR increases its deliveries in the coming years, I anticipate that the resulting incremental forward losses will be a severe drag on cash flow. Moreover, management has pointed out price inflation pressures from utilities, labor, logistics, and the supply chain.

For SPR, I see an outlook for FY23 that is reminiscent of 2022, when SPR delivery expectations were higher than BA’s. In FY22, persistent difficulties and adjustments to the production schedule posed a threat to SPR’s bottom line throughout the year. As such, I believe SPR’s FY23 outlook is extremely vulnerable, especially due to the growing need for a 737 MAX shipset inventory buffer and the huge volume step-up required (27%) to hit 42 per month by FYE23.

Earnings results

4Q22 adj EPS for SPR was -$1.46, well below the consensus estimate of -$0.12. Overall, revenue was up 23% year-over-year to $1.32 billion, and adj segment EBIT was $152 million. Earnings for 4Q22 reflect an adjustment for net forward losses, unfavorable net cumulative catch-ups, and excess capacity costs. SPR also reported -$66 million of FCF. SPR anticipates a CF surplus in FY23 and the delivery of 420 737 shipsets.

737 production

SPR expects a total of 420 737 MAX shipset deliveries in FY23, up from 281 in FY22. The 420 deliveries include both previously produced shipsets (20) and newly produced shipsets (400). By the end of FY23, SPR hopes to have reached a monthly production rate of 42, which would result in nearly 500 deliveries in FY24. While the implications appear promising at first glance, I have my doubts about how simple it will be to implement in light of BA’s recent earnings call comments that it plans to stabilize at a much lower rate (I do personally have some suspicions that SPR management has had some kind of behind-the-scenes chat with BA before establishing this goal). While the company anticipates an increase in 737 MAX shipset deliveries, the inventory buffer for the program has increased to 90 shipsets, up from 72 shipsets in the previous quarter. As production increases, I anticipate that SPR’s inventory buffer will be depleted as the company moves toward making 42 or more deliveries per month (if BA supply chain allows). As a result, I’m very worried that the expanding stockpile will pose risks to future growth if the burndown happens faster and at a higher rate than anticipated.

FCF

In light of the positive effects of the pension value plan’s demise, SPR is now projecting FCF to be higher than the breakeven point. However, I am very concerned about the FY23 FCF outlook. For the 737 MAX program specifically, for example, the breakeven rate has increased due to higher utilities, manpower, distribution, and supply chain costs. Getting to the new monthly goal of 42 deliveries will require more manpower. There would also be a further decrease in FCF because of forward loss charges related to the 787 and A350 programs.

I think anyone who kept up with the SPR story last year would recognize the current events as eerily similar to those of the previous year. SPR’s FCF guidance/outlook decreased further throughout FY22, mainly due to customer schedule shifts. Given the inherent uncertainty of airline schedules, I anticipate that SPR’s FCF story in 2023 will bear many similarities to that of 2022, when SPR delivery outlook was higher than BA’s outlook but subsequently lowered over the course of the year. So, while management is bullish on FCF, I’m concerned they won’t deliver on their promises.

Conclusion

In conclusion, the recent increase in SPR stock price is likely due to optimistic reactions to the SPR comments on a higher-than-expected 737 MAX production rate. However, management’s FY23 FCF outlook is concerning, as the breakeven point has increased due to higher costs and there is a risk of forward loss charges from other programs. Given the similarities to SPR’s FCF story in 2022 and the inherent uncertainty of airline schedules, I have doubts about SPR’s ability to deliver on its promises for FY23 FCF.