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Spirit AeroSystems, Inc. - A Maker of Cloud Cars

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August 28, 2010 – Comments (2) | RELATED TICKERS: SPR , BA

Over the past several months we have noticed that the investment metric of the month is the price to book ratio. This metric, at least to us, seems to be replacing the ever ubiquitous, price to sales metric, the metric that several years ago was the penultimate investment metric.

The Wax Ink Raw Value Worksheet includes all sorts of metrics. The only reason it does is because the individual investors we market to, and the money managers we work with, want them. In short, we include them because our marketplace thinks they are important.

Our view, and it is the view we have held for the past 26 years, is that purchasing a stock is no different than purchasing a new car or truck. When you purchase a new car or truck, you know the instant you sign on the dotted line, the value will go from a big number to a not so big number thanks to depreciation. The problem is, you get no price reduction for depreciation.

Since many buyers intuitively know this, they haggle over price, attempting to get it as low as reasonably practical, not only to keep their payments down, but in hopes of one day recapturing just a bit of the losses suffered through depreciation.

Yet when it comes to investing, nobody seems to follow the same philosophy they follow when buying a car. They simply buy the stock because an analyst or for entertainment purposes only newsletter, thought it was a great investment.

At Wax Ink there are four investment metrics we pay attention to. Our Price to Buy Target, our Price to First Sell Target, our Price to Close Target, and our Risk Adjusted Buy Target.

We pay attention to these metrics because unlike most other investment sites, we think actually determining a value for the stock we want to purchase is important.

So based on our analysis of a company's financial information, we determine what to us is a Reasonable Value for the stock, based on a 5 year hold. And miracle of miracles, we do that before we purchase a stock.

We explained all of this to one of our newer money manager accounts last week when we were asked about Spirit Aerosystems Holdings, Inc. (NYSE: SPR), an independent designer and manufacturer of non-OEM aircraft parts.

Basis

Financial information related to Spirit Aerospace Holdings, Inc. contained in this report, is based on the company's most recent SEC Form 10-K filing for fiscal year ending December 31, 2009, as filed with the Securities and Exchange Commission on February 26, 2010.

What They Do

The company is the largest independent non-OEM (original equipment manufacturer) aircraft parts designer and manufacturer of commercial aerostructures in the world, as well as the largest independent supplier of aerostructures to The Boeing Company, Inc..

In addition they are one of the largest independent suppliers of aerostructures to Airbus. Aerostructures are structural components such as fuselages, propulsion systems and wing systems for commercial and military aircraft.

The company was formed in February 2005 as a holding company and commenced operations in June 2005 following the acquisition of the commercial aerostructures manufacturing operations of Boeing.

The company manufactures aerostructures for every Boeing commercial aircraft currently in production, including the majority of the airframe content for the Boeing B737, the most popular major commercial aircraft in history.

As a result of their unique capabilities both in process design and composite materials, the company was awarded a contract that makes them the largest aerostructures content supplier on the Boeing B787, Boeing’s next generation twin aisle aircraft.

In addition, the company is one of the largest content suppliers of wing systems for the Airbus A320 family, and a significant supplier for Airbus’ A380.

Sales related to the large commercial aircraft market, some of which may be used in military applications, represented approximately 96% of the company's net revenues FY09.

Short-Term Investment

The stock closed recently at $19.01, with First Resistance at $20.55, a 7% increase from a recent close, and Support at $15.03, a 21% decrease from a recent close.

The stock is currently trending downward and just moved from an oversold condition. Since we think the stock may trade in the $19-$20 range over the near term we have no interest in making a short-term investment at this time.

Long-Term (5 Year Hold) Investment

To us the company's financials are just not that compelling. Certainly the industry in which the company operates plays a large role in creating a balance sheet worthy of investment. For instance, the company's inventory rate is 1.56 meaning that the company turns its inventory slightly more than once a year, not something many investors are comfortable with.

One of the positive notes is the company collects its receivables on average every 18 days, while paying its bills on average every 47 days, meaning that the company's suppliers are providing them company with an interest free 30 day loan. To us, this bodes well for management.

On the downside, management allowed the company's debt to increase by almost $306 million, year over year. While we realize interest rates are at historical lows, and that the company's average interest rate declined slightly more than 2% year over year, we note that the company spent almost $2 million more in interest payments year over year, making us curious about a plan by management to reduce debt going forward.

Valuations

Based on our preliminary review of the company's financial information, we think a Reasonable Value Estimate for the stock is in the $36 to $39 range, and based on that estimate, would set an initial Buy Target in the $21 range.

However, we realize that investing is not done in a vacuum. There are tremendous risks based on the world's current economic uncertainty. This economic uncertainty can cause the companies that Spirit AeroSystems does business with, to delay, or even cancel orders.

Because of these potential economic uncertainties, we think investment risk is increased, and have adjusted our initial Buy Target downward into the $16-$18 range.

Final Thoughts

Buying individual equities is not for the feint of heart. The risk of loss of investment capital is ever present.

Sound consideration regarding the need to add a particular equity to a portfolio should be a contributing factor. Determining what an individual equity may be worth down the road should also be apart of any investor's due diligence.

We believe as many seasoned money managers do, that price determines return, and failing to give reasonable consideration to the price paid for any equity may leave investors paying for a Rolls Royce, but driving a Yugo.

Wax

Worksheet

To download the Wax Ink Raw Value worksheet for Spirit AeroSystems, please click here.

2 Comments – Post Your Own

#1) On August 29, 2010 at 12:23 PM, revbaumgartner (< 20) wrote:

I worked for Spirit and can't say much good about how they operate. They seem to have deep pockets, they spend a lot and borrow a lot. Work gets done over and over and over. They bid low and consistently disappoint their clients. I don't know, maybe they can remain standing and actually make a buck some day far far far in the future. On principle, I wouldn't put a dime in them.

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#2) On August 29, 2010 at 8:11 PM, wax (97.13) wrote:

As we noted, the amount of debt the company has seems to keep increasing with no real plan to repay it.

As to the company's deep pockets. The company came into being via a company called Onex Partners LP and Onex Corporation which bought Boeing's Witchita, Kansas operations and following that purchase, bought the aerostructures division of BAE, the principal aerostructures supplier to Airbus.

When you supply both of the world's largest commercial aircraft manufacturers, we assumed you would be a very well oiled company. Alas, that's not exactly what we found.

As the matter of fact, an item we did not include in the piece, was even buying the stock within our risk adjusted buy range, the Market Advantage, or the odds of reaching our Reasonable Value estimate after a five year hold, were 1.39 to 1 against the purchaser.

Wax

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