Spirit AeroSystems Stock Tumbles On Bad Boeing 737 MAX News

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Spirit AeroSystems (NYSE:SPR) provided its first quarter results on the 4th of May. The aerospace supplier posted revenues of $1.18 billion, beating estimates by $90 million marking a 31 percent year-over-year growth while earnings per share of $0.03 beat by $0.62. So, Spirit AeroSystems beat expectations but shares tumbled 7% on a green day for the market. In this report, I will have a look at the results and show why share prices sharply declined.

Boeing 737 MAX pushes down Spirit AeroSystems

Spirit AeroSystems results (Spirit AeroSystems)

Overall, sales grew by 30% where increased demand for air travel drove higher aftermarket sales and higher production rates drove the commercial revenues. Defense showed the appreciable stability. On earnings level, we saw significant improvements with Defense & Space and Aftermarket profits being up by two-thirds and Commercial losses narrowed by 96%. The Commercial arm still carried $46.8 million in excess capacity costs and $9.5 million of COVID-19 related costs. Excluding the COVID-19 pressure, Commercial would actually have been profitable again and there were $25.8 million in forward losses and $26.4 million in negative catch-up adjustments. Absent of these cost components but still including the excess capacity, costs margins would actually be 6% for the commercial segment and 8% for the entire company.

Shipsets deliveries Q1 2022 (Spirit AeroSystems)

The results from Spirit AeroSystems certainly were not bad, but there are significant pressures. Raw material costs increases drove up the negative cost adjustments on the Boeing 737 program, while lower production rates and cost for rework on the Boeing 787 and additional costs on the Airbus A350 resulted in a $25.8 million forward loss.

Boeing 737 MAX 7 (The Boeing Company)

During the quarter, Spirit AeroSystems delivered 60 737 shipsets and the company expects to produce 315 shipsets this year with a reduced burn off on the inventory of 85 produced shipsets. Spirit AeroSystems went from a production rate of 21 shipsets per month in April to 31 in May. That rate break is going to reduce the excess capacity cost and improve unit costs and revenues. However, the big blow for Spirit AeroSystems is that a rate increase likely to 42 aircraft per month that was anticipated in the fourth quarter of the year will not take place. This is something that Boeing (BA) actually discussed in its earnings call without detailing the de-risk plans to guard the business against softness from China. That the rate won’t see another hike this year is a very realistic assessment with the COVID-19 problems that the Chinese domestic market is currently struggling with in mind, but it also means a delay in financial improvement for Spirit AeroSystems while on the Boeing 787 program the rates have even been brought down further and 20 shipsets are expected to be produced this year.

Airbus A321LR (Airbus)

The Boeing 737 increased production will certainly have a big positive impact on results, but a further hike absence was disappointing. The Airbus A320 shipsets totalled 155 during the quarter, and given that the first quarter tends to be rather slow, there were hopes that the strong shipset volume for the first quarter would be an indication that shipset numbers for the Airbus A320 would be around 650 units. Spirit AeroSystems, however, kept the guidance at 600 shipsets which is a bit low. For the Airbus A350, 50 shipsets are planned which is lower than the number of deliveries Airbus (OTCPK:EADSF) (OTCPK:EADSY) made in the past two years.

Conclusion

Spirit AeroSystems beat expectations on top and bottom lines, but that was not enough for share prices to skyrocket. Instead, shares lost 7% of their value as the aerospace supplier could not positively surprise for key programs such as the Boeing 737 and Airbus A320. On the Boeing 737 program, COVID-19 pressures in end-markets are keeping the production rate at current levels through the end of the year while Spirit AeroSystems anticipated a second rate increase in late 2022. Simultaneously, strong shipsets volumes for the Airbus A320 did not result in a satisfactory guidance for shipset numbers for the year.

As an investor in Spirit AeroSystems, I continue holding my shares of the aerospace supplier. I can appreciate that the company is diversifying its business by platforms and end market, but there is no doubt that the prospects for 2022 have cooled. Spirit AeroSystems still has a lot of potential in the coming years, but 2022 is simply going to be below expectations. For investors who are considering a long-term investment, this could be an opportunity to add shares.