Boeing Considers Spirit Aero Acquisition

Talks Underway to Improve Quality Amid Recent Manufacturing Problems

Boeing is currently in discussions to acquire its fuselage provider, Spirit AeroSystems, in an effort to enhance quality following recent manufacturing issues with the 737 MAX jet. Wall Street analysts have started to weigh in on the potential purchase of a former supplier previously part of Boeing.

Background Information

Confirmed by both companies after initial reports by The Wall Street Journal, Spirit AeroSystems generates approximately 60% of its sales from Boeing due to its previous connection with the company. Initially sold to private-equity firm Onex in 2005, Spirit Aero went public a year later with shares priced at $29 each.

Market Response

Despite a disappointing performance, Spirit Aero stock experienced a significant spike of 15.3% to $32.98 on Friday upon news of the acquisition talks. The stock continued to rise by 2.6% in premarket trading on Monday, reaching $33.85 per share. In contrast, S&P 500 and Dow Jones Industrial Average futures saw slight declines while Boeing shares dipped 0.1% early Monday following a 1.8% decrease on Friday.

Analyst Insight

According to Jefferies analyst Sheila Kahyaoglu, the ideal scenario would involve Spirit AeroSystems addressing its manufacturing challenges internally while maintaining a beneficial partnership with Boeing as production rates increase, leading to enhanced profits and cash flow for both entities. However, given the critical role of Spirit Aero in Boeing's operations, there is a need to safeguard the 737 MAX program against competition from Airbus.

Potential Benefits

Kahyaoglu suggests that reintegrating Spirit Aero could result in cost savings of up to $400 million annually for Boeing. While acknowledging the inherent risks of acquiring a struggling supplier, she views this strategic shift favorably for long-term growth and development.

Analyst Ratings

Kahyaoglu recommends buying Boeing stock with a price target of $300 and rates Spirit Aero stock as a Buy with a target price of $40.

Analysts Weigh In on Boeing and Spirit Aero Merger

CFRA analyst Stewart Glickman takes a contrarian stance, assigning a Sell rating to Boeing stock with a $194 price target. According to Glickman, Boeing is diligently addressing quality control issues to avoid further defects. He also highlights potential complications for Airbus, as Spirit AeroSystems supplies fuselages to both Boeing and Airbus.

Impact on Airbus

Spirit Aero generated approximately $1.1 billion in sales from Airbus in 2023, accounting for about 2.5% of Airbus' operating expenses. Citi analyst Charles Armitage speculates that if Boeing acquires Spirit Aero, it may need to divest the Airbus segment to avoid conflict of interest. Armitage predicts that Boeing could sell Spirit Aero's Airbus business back to Airbus without significant financial impact on the European aircraft manufacturer.

Stock Ratings

• Charles Armitage rates Airbus stock as Buy with a €190 price target.
• Rob Stallard views a potential Boeing-Spirit Aero merger as being neutral for Airbus.
• Stallard maintains a Hold rating on Spirit Aero stock with a $31 price target and on Boeing stock with a $230 price target.

Insights and Recommendations

Rob Stallard advises investors to consider taking profits if they have invested in Spirit Aero. He believes that while acquiring Spirit Aero may offer long-term advantages for Boeing, it could also compound the company's immediate challenges. Boeing would need to navigate business integration, quality enhancement efforts, and production scale-up for its crucial MAX aircraft amidst heightened regulatory scrutiny.

Moving Forward

The decision to stay separate or merge poses both obstacles and opportunities for Boeing and Spirit Aero. Ultimately, Boeing may have to pursue a bold course of action to address the evolving landscape of the aerospace industry.