Spirit Fell Over 5% Yesterday on Boeing’s Bad News

Spirit AeroSystems plunged more than 5%

Shares of Spirit AeroSystems (SPR) fell over 5% on July 8 following news that Boeing (BA) lost a major customer for its 737 MAX aircraft to its rival Airbus.

On July 7, Boeing revealed that flyadeal, the wholly-owned subsidiary of Saudi Arabian Airlines, had canceled its provisional orders for 30 MAX planes with an option for purchasing an additional 20 jets. The deal was considered to be worth $5.9 billion at list price.

Spirit Fell Over 5% Yesterday on Boeing’s Bad News

Boeing’s announcement came after Saudi Arabian Airlines released a statement stating that it had agreed with Europe’s Airbus to buy 30 A320neo jets with an option to purchase an additional 20 aircraft.

The airline’s decision to cancel its Boeing orders resulted from the aircraft manufacturer’s inability to deliver the jets on time. On July 7, a Boeing spokesperson said, “We understand that flyadeal will not finalize its commitment to the 737 MAX at this time given the airline’s schedule requirements,” according to Reuters.

Orders and deliveries for Boeing’s fast-selling 737 MAX planes have remained frozen since mid-March following the fatal crashes of two similar model planes in which 346 people lost their lives. In May, Boeing’s overall commercial aircraft deliveries fell 56% year-over-year to 30 units from 68 units in May 2018.

Due to its lack of MAX deliveries, Boeing reduced its monthly production of the model to 42 units in April from 52 in March. Declining orders and production cuts for the MAX aircraft will negatively affect the company’s key component suppliers.

Spirit AeroSystems builds ~70% of the 737 MAX jet structure, which accounts for ~50% of its total revenue. Spirit’s massive overdependence on Boeing’s troubled single-aisle planes is making investors more cautious about its growth prospects.

Jefferies downgraded Spirit stock

On July 2, investment research company Jefferies downgraded and lowered its earnings outlook on Spirit AeroSystems. Jefferies cited uncertainty surrounding Boeing’s MAX planes. Analyst Sheila Kahyaoglu believes that the stock has limited upside potential given its massive exposure to MAX jets. She lowered the rating on the stock to a “hold” from a “buy” and trimmed its target price by $21 to $85.

Kahyaoglu also cut Spirit’s earnings estimates for fiscals 2019 and 2020. For 2019 and 2020, she now expects earnings of $6.90 and $7.25, respectively, instead of the previous expectations of $7.10 and $7.70, respectively. Wall Street’s consensus EPS estimates for fiscals 2019 and 2020 are $7.00 and $7.90, respectively.

Spirit’s YTD performance

SPR has been under tremendous pressure since mid-March after a MAX jet operated by Ethiopian Airlines crashed on March 10. Before the mishap, Spirit AeroSystems’ YTD (year-to-date) return was 33.8%.

However, the stock has fallen massively since then. At its closing price of $74.74 on July 8, the stock’s YTD gain remained at a mere 3.7%. The stock is currently trading near the 52-week low of $64.48 it hit on December 26, 2018. It’s down 25.5% from the 52-week high of $100.34 it reached just six days before the Ethiopian Airlines crash.

The stock’s YTD gain is significantly lower than the returns of the iShares US Aerospace & Defense ETF (ITA). ITA covers manufacturers, assemblers, and distributors of aerospace and defense equipment. The ETF is up 22.9% YTD.

Hexcel (HXL) and Allegheny Technologies (ATI) are a few other companies that have significant exposure to Boeing. Hexcel supplies carbon fibers to plane makers, while Allegheny specializes in providing titanium products for aerospace applications. Hexcel and Allegheny stocks fell 1.3% and 3%, respectively, on July 8 after the news of Boeing’s customer loss surfaced.