- Wednesday, October 16, 2024
Shares of Spirit AeroSystems, a key Boeing supplier, have recently been given a new Buy rating despite ongoing problems surrounding the 737 MAX. These issues have been causing delays in MAX delivery schedules for Boeing and impacting the revenues of Boeing suppliers.
On Tuesday evening, Citi analyst Jason Gursky initiated coverage of Spirit Aerosystems with a Buy rating and set a price target of $39. This bold call has piqued the interest of investors; however, cautiousness remains prevalent. Spirit Aero shares saw a slight increase of 0.4% in premarket trading, reaching $26.10. At the same time, both the S&P 500 and Dow Jones Industrial Average futures experienced a decline of about 0.4%.
It is important to note that some caution is warranted, given that Boeing stock has fallen nearly 20% since the incident involving an emergency door plug blowing out of a 737 MAX 9 jet operated by Alaska Air on January 5th. As a result, the Federal Aviation Administration has grounded approximately 170 MAX 9 jets while intensifying its oversight of Boeing's manufacturing system.
Spirit AeroSystems plays a crucial role as a supplier of MAX fuselage for Boeing. Consequently, its shares have also dropped about 18% since the Alaska Air incident, which led to a safe emergency landing with no major injuries to passengers or crew members.
The Contrarian Approach: Spirit Aero and Boeing Uncertainty
There is a prevailing sense of uncertainty surrounding Boeing and its suppliers, with Spirit Aero being particularly sensitive to the issues affecting the commercial aerospace giant. In fact, approximately 60% of Spirit Aero's total sales are generated from its association with Boeing.
However, in times of heightened fear, sometimes adopting a contrarian stance can be a wise move.
According to Gursky's coverage launch report, it is assumed that the impact of the MAX 9 will be short-lived and will not significantly affect the 2024 estimates or the long-term production targets. Based on this assumption, Gursky believes that the current peak fear offers a unique opportunity.
Gursky's recommendation to buy shares of Spirit Aero is not solely based on buying at the peak of fear, though. He highlights the improving demand in the commercial aerospace industry and mentions that Spirit Aero has recently renegotiated contracts with Boeing. These contract renegotiations are expected to positively impact earnings and cash flow in the future. Gursky envisions a potential path towards a stock price of " $50-plus" over time.
At present, Gursky's position is somewhat unconventional, as only 43% of analysts covering Spirit Aero stock rate it as a Buy. In comparison, the average Buy-rating ratio for stocks in the S&P 500 stands at around 55%.
Nevertheless, being an outlier does not imply being incorrect. The short-term performance of Spirit Aero stock is likely to be closely linked to the MAX 9's return to service. After that, it will be up to Spirit Aero management to focus on improving earnings and cash flow.
By Al Root
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