Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Spirit AeroSystems's recent results tell us about its potential for future gains.
What the numbers tell you
The graphs you're about to see tell Spirit's story, and we'll be grading the quality of that story in several ways.
Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Spirit's free cash flow has grown in comparison to its net income.
A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Spirit's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.
Is Spirit managing its resources well? A company's return on equity should be improving, and its debt-to-equity ratio declining, if it's to earn our approval.
By the numbers
Now, let's take a look at Spirit's key statistics:
Revenue growth > 30%
Improving profit margin
Free cash flow growth > Net income growth
130.1% vs. (78.6%)
Stock growth (+ 15%) < EPS growth
(6.3%) vs. (78.5%)
*Period begins at end of Q3 2009.
Improving return on equity
Declining debt to equity
*Period begins at end of Q3 2009.
How we got here and where we're going
Three out of seven possible passing grades isn't particularly impressive. Spirit fell hard in the third quarter when it revealed large tax write-offs for several aircraft programs, which explains why the company's net income tanked in the latest quarter we looked at. The company's forward guidance for 2013, however, comes in ahead of expectations on the bottom line, which could help turn this performance around when we examine it next.
Much of this weakness is a bit out of Spirit's hands. As the primary supplier for major components of several Boeing planes, including the long-delayed 787 Dreamliner, Spirit is tied closely to the demand for these jets. Spirit handles the manufacturing of parts for several other major aircraft, as well, but none of them are as integral to Spirit as Boeing. The breakdown of Spirit's inventories, by major manufacturer, looks a bit like this :
EADS subsidiary Airbus: 20%
General Dynamics subsidiary Gulfstream: 19%
All others: 1%
Spirit's primary source of orders from Boeing is the 787, which comprises more than double the inventory buildup of any other platform -- the other two notable planes in Spirit's roster being the Airbus A350 and, interestingly, the Gulfstream G650, the inspiration for the rap song "Like a G6."
In late 2011, I calculated a potential increase in revenue from full construction capacity of the 787, and the only company that would come close to matching Spirit's reliance on the that craft's rollout was Goodrich, which supplies Boeing with a large amount of electronic components, and which was purchased by United Technologies half a year ago . Plenty of other companies have a lot riding on Boeing's timeliness -- General Electric supplies the jet turbines, Honeywell supplies lighting systems. Before Goodrich's acquisition, it might have been similarly positioned to Spirit, but none of the other major suppliers rise and fall on the wings of Boeing's Dreamliner.
Unfortunately, Boeing has made a hash of the 787's development and rollout. The company lost another sale to Airbus earlier this week, and with a strike on the horizon at Boeing plants, Spirit shareholders might be in for some agony for the next quarter or two.
Putting the pieces together
Today, Spirit AeroSystems has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
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The article Is Spirit AeroSystems Destined for Greatness? originally appeared on Fool.com.
Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter, @TMFBiggles, for more news and insights.The Motley Fool recommends Spirit AeroSystems Holdings and owns shares of General Dynamics and General Electric. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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