XAR - Spirit AeroSystems: Improving Earnings But Patience Required

Summary

• Aerospace & Defense stocks continue to perform well even with a relative pullback in the industrial sector this year.
• Spirit AeroSystems has a poor post-earning share price reaction history, but I see longer-term upside.
• With improving EPS and a bullish technical chart forming, patience might be needed given recent poor earnings reactions.

Aerospace & Defense stocks have been a bright spot in a struggling sector (relative to the market) this year. The SPDR S&P Aerospace & Defense ETF ( XAR ) is up more than 15 percentage points on SPY in the last year and outperforming to start 2023.

One of its components features improving earnings with a bullish chart pattern ahead of what could be a shaky earnings report.

Aerospace Ascends vs SPY

According to Bank of America Global Research, Spirit AeroSystems Holdings, Inc. ( SPR ) is the largest independent original parts designer and manufacturer of aerostructures in the world. Spirit was formed as a result of Onex Partners purchasing Boeing Wichita (June 2005) and BAE Aerostructures (April 2006). The company's segments include Fuselage Systems, Propulsion Systems, and Wing Systems. Boeing and Airbus S.A.S are the major contributors to the revenues of the company.

The Kansas-based $3.6 billion market cap Aerospace & Defense industry company within the industrial sector has negative trailing 12-month GAAP earnings and has a small 0.1% dividend yield, according to The Wall Street Journal .

On valuation , analysts at BofA see earnings on the mend with SPR. After being steeply in the red in 2020 through 2022, per-share profits are seen as climbing into the black this year with a further positive acceleration into 2024. The Bloomberg consensus is more downbeat in the short run than BofA, but actually higher on earnings come next year.

Dividends may go to zero though despite free cash flow improvement. With a strong earnings recovery, both Spirit’s operating and GAAP P/Es should retreat to favorable levels later this year with the 2023 EV/EBITDA multiple being slightly under the market average. Overall, I like the profitability turnaround here as the firm diversifies away from Boeing.

Spirit AeroSystems: Earnings, Valuation, Free Cash Flow Forecasts

Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q4 2022 earnings date of Tuesday, February 7 , before the open with an earnings call later that morning. You can listen live here . The risk calendar is light on volatility catalysts aside from the reporting date.

Corporate Event Risk Calendar

The Options Angle

Digging into the upcoming earnings report, data from Option Research & Technology Services (ORATS) show a consensus EPS forecast of $-0.30 which would be an improvement from a per-share loss of $0.65 in the same quarter a year ago. What’s bearish is that the stock has traded lower post-earnings in six of the previous eight earnings announcements with a somewhat negative EPS beat rate history. Since the last report, there has been a single analyst upgrade of the stock.

With bearish trends, what are options traders expecting? The at-the-money straddle expiring soonest after next week's Q4 report reveals an expected 7.2% stock price swing. That is smaller than the 11% seen in advance of the November earnings release. But SPR has rarely traded outside the straddle over the last few quarters, so I would be inclined to sell premium here.

SPR: Bearish Earnings Reaction History

The Technical Take

With somewhat pricey options, what does the chart say? I see bullish potential. Notice in the chart below that shares are forming a bullish cup and handle after a rounded bottom over the back half of 2022. The price target based on a would-be breakout above $36 would be into the low $50s – near the range highs from 2021 and early 2022.

What’s more, the RSI momentum is in an uptrend and there have been a pair of volume spikes around rallies lately – bullish factors. On the bearish side, there could be tough slogging for the bulls due to high congestion in the $37 to $53 range, so it’s not all rosy here.

Overall, though, I like the potential setup and see near-term support at $32 and $26. And we want to see the stock rise above $36.

SPR: Bullish Cup And Handle With Improving RSI And Volume Trends

The Bottom Line

There are risks with SPR relating to its dependence on Boeing’s 737 MAX, but the firm is taking steps to diversify from that. With earnings on the mend and a bullish chart ahead of earnings, I see decent upside potential though next week’s earnings report could see a negative share price reaction.

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