Long Idea Update: Spirit AeroSystems Holdings, Inc. (SPR)

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Spirit AeroSystems (SPR: $78/share) – Maintaining Long Position – SPR +40% vs. S&P +3%

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Spirit AeroSystems (SPR) was selected as a Long Idea on 6/26/17 in An Undervalued Stock That’s Ready for Take-Off. SPR earned a Very Attractive risk/reward rating at the time due to its high return on invested capital (ROIC), high free cash flow (FCF) yield, and low price-to-economic book value (PEBV) ratio.

Following a 27% gain driven by strong 2Q17 earnings and a new Boeing contract, SPR’s risk/reward rating was downgraded one level to Attractive on 8/7/17 due to higher market-implied expectations. The shares have risen an additional 13% since, but still earn an Attractive rating as of 9/22/17. Current fundamental and valuation highlights underlying SPR’s Attractive rating include:

  • Economic EPS is 84% of GAAP EPS for SPR vs. 41% for Industrials and 36% for the S&P 500.
  • ROIC of 14% for SPR ranks in second quintile overall vs. 9% for Industrials.
  • FCF Yield of 10% for SPR vs. 1% for Industrials and 2% for the S&P 500.
  • PEBV valuation of 1.3 for SPR vs. 2.2 for Industrials and 2.5 for the S&P 500.
  • Growth Appreciation Period (GAP) of <1 year vs. 27 years for Industrials and 23 for S&P 500.

SPR continues to offer an attractive risk/reward trade-off based on potential upside to low market-implied expectations for future profit growth. To justify the current price of $78/share, SPR must grow NOPAT by just 1% compounded annually over the next ten years. If SPR can grow NOPAT by 3% compounded annually over the next ten years, the stock is worth $95/share today – a 21% upside. This scenario assumes a stable NOPAT margin of 8% and revenue growth of 4% compounded annually.

Figure 1: SPR Stock Price and Risk/Reward Rating History

Sources: New Constructs, LLC and company filings

This article originally published on September 22, 2017.

Disclosure: David Trainer, Kyle Guske II, and Kenneth James receive no compensation to write about any specific stock, style, or theme.