Al Root
Boeing and the aerospace supply chain have navigated a costly labor strike with surprising ease. One of Boeing's key suppliers, however, has run into significant trouble.
Tuesday, fuselage supplier Spirit AeroSystems filed its quarterly report with the Securities and Exchange Commission. The company lost $1.5 billion in the first nine months of 2024 and used $1.2 billion more than it generated to fund operations.
Frankly, weak results aren't a surprise. Spirit Aero generates a majority of its sales from Boeing, and Boeing's production was lower than expected in 2024 -- even before workers walked out on Sept. 13.
Spirit Aero's filing, however, also included a "going concern" warning.
That's significant. Going concern warnings are used when there is substantial doubt a company can continue to conduct normal business operations without significant restructuring, explains accounting expert Robert Willens.
The odd part of the situation is that Boeing is acquiring Spirit Aero in a deal that's supposed to close in 2025. The agreement has the support of regulators and is part of Boeing's plan to improve production quality -- which came under significant scrutiny after an emergency door plug blew out of a 737 MAX 9 jet on Jan. 5 while in flight.
Spirit Aero supplied the fuselage for that plane and its production quality played a role in the incident.
Willens couldn't recall a situation where a company being acquired issued a warning after the deal was struck but adds the warning is appropriate given the financial metrics. Auditors don't consider coming deals when evaluating the need for a warning.
Spirit Aero didn't immediately respond to a request for comment.
Boeing's financial condition isn't great right now either, but it still has billions in liquidity and a business backlog of roughly half a trillion dollars. Spirit Aero's market value is a fraction of Boeing's.
The deal doesn't appear to be risk. Boeing referred Barron's to CEO Kelly Ortberg's comment on the company's third-quarter earnings conference call on Oct. 23.
"There's no change in our commitment to the Spirit acquisition and the integration," he said. "That's clearly one of our major activities here in terms of stabilizing the business as they're a big part of the supply chain."
Shares of the supplier dropped 5% on Wednesday to $31.10 after the warning, but the stock is still tied to Boeing's all-stock offer of $37.25 a share.
"We would assume that Boeing will likely have to inject capital to Spirit," wrote BofA Securities analyst Ron Epstein in a Thursday report. He added that Boeing advanced Sprit Aero about $425 million earlier in the year to support operations; that was before the deal to acquire the supplier was struck. "We would not be surprised to see another such arrangement be announced, the analyst said.
He rates Boeing stock Hold and has a $170 price target for shares.
Boeing investors don't want to see Boeing use cash, but any amount to shore up Spirit will be measured in the hundreds of millions. That's a fraction of Boeing's more than $40 billion in short-term liquidity available.
What's more, Spirit AeroSystem's problems and Boeing's issues all stem from the same thing: Boeing needs to make more planes. When it does, Spirit Aero's cash flow improves and Boeing can make money again.
Wall Street sees Boeing manufacturing about 540 planes in 2005 and 700 planes in 2026 after delivering an expected 360 in 2024.
More planes will cure a lot of what Boeing and its supply chain are dealing with right now.
Through midday trading Thursday, Boeing stock was down about 8% since its labor strike began. Shares were also down about 42% year to date and 40% since the door plug blew out.
Other suppliers haven't felt as much pain. Shares of GE Aerospace were up about 76% year to date and up about 6% since Boeing's strike began.
Spirit Aero shares were up 0.3% at $32.10 in midday trading Thursday while the S&P 500 was up 0.6% and the Dow Jones Industrial Average was flat. Boeing shares added 2.2% to $150.50.
Write to Al Root at allen.root@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 07, 2024 12:07 ET (17:07 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments