What Is Driving The Rally In Spirit Aerosystems Stock?

Shares of Spirit Aerosystems (NYSE: SPR) have rallied by over 110% since November 2020 when Pfizer reported a high efficacy rate of its vaccine and the FAA lifted its ban on MAX aircraft. Investor optimism towards the company that manufactures fuselage, propulsion, and wings for Boeing and Airbus drove this rally.

While the shares have more than doubled over the past few months, Trefis believes that subdued air travel demand is likely to remain a challenge for aircraft manufactures as most airlines continue to cut down on capital expenses. Per recent filings, Boeing expects its production rate to remain stalled until 2022, and Spirit Aerosystems SPR generates 79% of its revenues from Boeing. Thus, the likelihood of a further uptick in the stock remains low.

Notably, a gradual recovery in SPR’s stock price also looks likely on comparing the trajectory in Spirit Aerosystems’ stock during the current crisis with that during the 2008 recession.

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 68% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

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In contrast, here’s how SPR and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Spirit Aerosystems Stock vs S&P 500 Performance Over 2007-08 Financial Crisis

SPR stock declined from levels of around $38 in September 2007 to levels of around $10 in March 2009 (as the markets bottomed out), implying SPR stock lost 74% from its pre-crisis level. It recovered post the 2008 crisis to levels of about $20 in early 2010 – rising by 100% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.

Spirit Aerosystems Fundamentals prior to the MAX crisis were stable

SPR’s Revenues grew by 16% from $6.8 billion in 2016 to $7.9 billion in 2019, supported by rising production volumes and order backlog. The company’s margins remained relatively stable while the EPS jumped by 37% due to lower shares outstanding. Since the suspension of MAX production in December 2019, the company’s revenues have observed a steep contraction which continued in Q3 2020.

CONCLUSION

Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Given the reduction in the 10-year commercial aircraft market outlook by Boeing during the third quarter, a high inventory level, and a low production rate, Trefis believes that the likelihood of a further uptick in Spirit Aerosystems stock remains low.

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