Analyst: Spirit AeroSystems outsourcing of fab work would make sense; Tulsa sale a 'wild card'

06/09/2014 10:42 AM

08/08/2014 10:24 AM

It would make sense for Spirit AeroSystems to outsource its fabrication operation, Cowen and Co. analyst Cai von Rumohr wrote in a note to investors.

A story in The Eagle last week said Spirit appears to be exploring that option.

“It would make sense to outsource fab work to a major Tier 2 build-to-print supplier, like PCP (Precision Castparts), which offers lower costs in return for higher market share,” von Rumohr wrote.

Cost savings could include more efficient machining utilization rates and lower material costs, such as internally sourced titanium, he wrote.

“Thus, while it’s impossible to size a potential outsourcing deal, it likely would be a win-win-win,” von Rumohr wrote.

In addition, Spirit’s recent update of its master contract with Boeing reduces risk for Spirit, he said.

Spirit and Boeing announced the master contract in April.

The pricing covers the Boeing 737, 747, 767 and 777 programs through Dec. 31, 2015.

The contract allows for price increases if production rates dip and for continued 737 and 777 profitability, he said. It also avoids locking Spirit into a risky long-term fixed price agreement.

In the meantime, a possible sale of Spirit’s Tulsa operation is still a “wild card,” von Rumohr wrote.

Spirit has been exploring a sale of that operation.

“We retain our ‘show me’ attitude toward (Spirit’s) possible sale of its Tulsa wing business,” he said.

That’s because Boeing and Gulfstream programs, which it has there, may attract two different buyers, von Rumohr wrote.

In addition, the work is done in one location, and any sale will require new contracts with Boeing and Gulstream. who might require price concessions in return for the agreement, von Rumohr wrote.

The sale of the Tulsa facility or a major fabrication outsourcing deal, however, would bolster investor confidence in Spirit’s cash flow outlook, he said.

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