SUCCESS STORIES - Spirit Aerosystems
A long term business champion in a short term focussed world
High quality business
Spirit Aerosystems is one of the world’s largest independent producers of commercial aerostructures with its core products including fuselages, pylons and wing components. The company is a key supplier of critical infrastructure to major aircraft manufacturers. Spirit Aerosystems holds long-term agreements in place with its largest customers, Boeing and Airbus.
Spirit’s business moat revolves around its practice of entering into very long duration contracts (often lasting over 20 years). such contracts often result in significant initial capex which deters competitors from bidding.
The stock price dropped dramatically following the Boeing Dreamliner program being held up by regulators leading investors to discount revenue that Spirit was poised to earn on this aircraft program. Additionally, Spirit spooked investors by announcing a sizable and surprise development charge relating to cost overruns. Investors also held concerns regarding the renewal of a key Boeing contract.
These negative events obscured the company’s recurring and growing free cash flow, which represents a large discount to both Spirit’s historical trading multiples, its competitors and the intrinsic value of the business.
Subsequently, the Dreamliner was cleared to fly again and investors rerated the stock. The core earnings emerged over time and the investment returned a 64% gain.