20131205-Canaccord_Research-INCREASED_CONFIDENCE_IN_IMPROVING_CASH_FLOWS__UPGRADING_TO_BUY_12页_462kb

Summary of Spirit AeroSystems (SPR) Document

Core Content

Spirit AeroSystems (SPR) is a leading tier-1 supplier of aircraft components for commercial and military aircraft, based in Wichita, Kansas. It was spun off from Boeing in 2005 and is the largest non-OEM supplier of commercial aircraft structures. The company's stock price is currently US$31.64, and the investment recommendation has been upgraded from HOLD to BUY, with a price target of US$38.00.

Investment Recommendation

• Rating Change: Upgraded from HOLD to BUY
• Price Target: Increased from US$28.00 to US$38.00
• Reasoning: Improved confidence in 2014 cash flow improvement, strategic direction, and the potential sale of Tulsa operations.

Investment Highlights

• Tulsa Sale: Expected to be a significant positive catalyst. The sale could add ~$210M to 2014 free cash flow.
• A350 Program: Additional charges are expected in 2014, but the company is working to improve execution and reduce fixed costs.
• Core Programs: The 737 and 777 programs are expected to see steady improvement, with the company focusing on these to stabilize cash flow.
• Management Changes: New CEO, Larry Lawson, has shown improved focus on cash, execution, and strategic vision.

Valuation

• Price Target Calculation: Based on the average of a 13.0x P/E multiple and a 7.5x EBITDA multiple applied to 2014 estimates.
• Implied Target Price: US$38.00, which is an average of $36.46 (P/E) and $38.90 (EBITDA).
• Valuation Multiples:
  • 2014: P/E 11.3x, EBITDA 7.5x
  • Historical normal range: P/E 6x - 12x, EBITDA 6x - 10x

Financial Performance and Outlook

Revenue

• 2012A: US$5,398M
• 2013E: US$6,014M
• 2014E: US$6,464M
• 2015E: US$6,975M

EBITDA

• 2012A: US$284M
• 2013E: US$308M
• 2014E: US$842M
• 2015E: US$889M

EPS

• 2012A: $0.24
• 2013E: $0.41
• 2014E: $2.80
• 2015E: $3.00

Key Cash Flow Drivers

• Tulsa Operations: Expected to be sold, which would improve cash flow.
• Cost Structure Reductions: Implemented in 2013 and expected to continue in 2014.
• Rate Stabilization on 787: Expected to positively impact cash flow.
• Mature Programs: 737 and 777 are expected to contribute significantly to cash flow.

Risks and Uncertainties

• A350 Program: Expected to face additional charges and cash consumption.
• Contract Negotiations with Boeing: Ongoing and uncertain, but expected to be finalized by early 2014.
• Market and Operational Risks: Includes airline profitability, demand for new aircraft, supplier contracts, labor relations, and defense budget changes.

Strategic and Financial Review

• Tulsa Divestiture: In progress, with a high probability of completion by Q1 2014.
• Focus on Core Programs: The company is shifting focus to its core Boeing programs to improve execution and cash flow.
• Financial Improvements: Management has indicated a more stable cash flow profile for 2014, with a goal of reaching industry normal free cash flow levels (~6-8% of sales) by 2015.

Key Financial Metrics

Summary of Valuation Table

Analyst and Disclosure Information

• Analyst: Ken Herbert
• Contact: 415.229.0646, kherbert@canaccordgenuity.com
• Disclosure: The analyst and related parties have financial interests in the company, including long and short positions, and have received compensation for services.

Investment Risks

• Airline profitability and demand for new aircraft
• Development schedules and timing of new aircraft introductions
• Supplier contracts and lead times
• Raw material prices
• Customer contract and pricing terms
• Labor relations
• Facility divestiture plans
• Mature program production schedules
• International and US defense budget plans
• Commercial aircraft maintenance schedules and aircraft utilization

Distribution of Ratings

• Buy: 562 stocks, 57.9% of coverage universe
• Hold: 313 stocks, 32.2% of coverage universe
• Sell: 47 stocks, 4.8% of coverage universe

Canaccord Genuity Ratings System

• BUY: Expected risk-adjusted returns of over 10% in the next 12 months
• HOLD: Expected risk-adjusted returns of 0-10% in the next 12 months
• SELL: Expected negative risk-adjusted returns in the next 12 months
• NOT RATED: No research coverage provided

Risk Qualifier

• SPECULATIVE: Stocks bear significantly higher risk and may result in material loss.

This summary highlights the company's financial performance, strategic direction, valuation, and the associated risks, providing a comprehensive overview for potential investors.