Boeing Sinks Amid Struggles for Top Supplier on Cash-Cow 737

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Is Boeing Caught in Trade War Crosshairs?

A “challenging” first quarter at Spirit AeroSystems Holdings Inc. may also spell trouble for its biggest customer: Boeing Co.

Boeing shares fell, dragging on the Dow Jones Industrial Average, after Spirit AeroSystems Chief Executive Officer Tom Gentile said the company is working through hurdles to meet increased production targets for the 737, Boeing’s main source of profit. Wichita, Kansas-based Spirit has deployed so-called “swat teams” to about a dozen struggling suppliers to ease bottlenecks as Boeing seeks to lift the run-rate to 57 planes per month by the end of 2019, up from 47 at the beginning of the year.

Boeing may already be at risk of missing first-quarter earnings estimates, based on “weak February deliveries,” including 787 and 737 shipments that were lighter than expected, Cowen & Co. analyst Cai von Rumohr wrote in a note, reiterating his outperform rating. The Chicago-based company has been facing larger headwinds as well, including concern that President Donald Trump’s steel and aluminum tariffs will translate to higher materials costs and that a reported levy on goods from China, Boeing’s top customer, could spark a trade war.

Boeing fell as much as 4.8 percent to $322.30, its lowest price since Feb. 9. Spirit dropped as much as 5.3 percent. Boeing has declined 8.2 percent since the beginning of March, the worst performance in the 70-member S&P 500 Industrials Index.

Still, the stock decline appeared to be an overreaction to production concerns, JPMorgan Chase & Co. analyst Seth Seifman wrote in a note.

“We believe Spirit is taking a hit so that it can meet its commitments to Boeing and so the financial impact of any difficulties with the production ramp should end in Wichita, not Seattle,” said Seifman, who rates Boeing overweight and Spirit neutral.

Supply Chain

Spirit gets about 79 percent of its revenue from Boeing, according to Bloomberg supply chain data, and provides about 70 percent of the 737 structure. Other Boeing suppliers also traded lower, including Triumph Group Inc. and Hexcel Corp., which get 32 percent and 25 percent of revenue from the planemaker, respectively.

The aerospace supplier is also “aggressively” looking at potential acquisition targets that provide parts to Airbus SE, which would lessen its dependence on former parent Boeing, Gentile said at a J.P. Morgan conference Tuesday. Some companies that get more than 25 percent of their revenue from Airbus include Latecoere SA, Sogeclair, FACC AG and Magellan Aerospace Corp., as well as Hexcel, based on supply chain data.

The company has also been rumored as a potential acquirer of GKN Holdings, once the U.K. manufacturer spins off its auto business to Dana Corp. However, Gentile emphasized taking a “disciplined” approach to acquisitions, saying the price would have to be right.

— With assistance by Michael Banas

(Updates with comments from analysts starting in the third paragraph.)
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