Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Spirit Airlines Inc (SAVE, Financial). The stock, currently priced at 15.06, recorded a loss of 5.76% in a day and a 3-month decrease of 10.13%. The stock's fair valuation is $36.31, as indicated by its GF Value.
The GF Value Concept
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
Unpacking the Risks
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Spirit Airlines should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.66. These indicators suggest that Spirit Airlines, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding the Altman Z-score
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Overview
Spirit Airlines Inc serves the United States, Latin America, and Caribbean as an airline operator. It primarily offers customers unbundled base fares to strip out any unneeded travel amenities. If needed, a customer can elect for additional options at an extra charge. The company has one operating segment, air transportation, owing to its system wide route structure. It may decide to expand its network if a market is underserved or overpriced. The majority of revenue is derived from the United States.
Breaking Down Spirit Airlines's Low Altman Z-Score
A dissection of Spirit Airlines's Altman Z-score reveals Spirit Airlines's financial health may be weak, suggesting possible financial distress:
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Spirit Airlines's historical data, 2021: 0.13; 2022: 0.09; 2023: 0.04, we observe a declining trend in this ratio. This downward movement indicates Spirit Airlines's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
Conclusion
Given the low Altman Z-score and the declining trend in the Retained Earnings to Total Assets ratio, Spirit Airlines appears to be a potential value trap. Investors should tread carefully and conduct thorough due diligence before considering an investment in Spirit Airlines. GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
