Spirit: The Airline Bargain Stock Gurus Are Missing

With the news of the day centering around a fire in my old hometown of Fort Lauderdale, Fla., I thought it fitting to discuss a great stock from the area that’s been burning shareholder capital.

Stock is down 50%, earnings are up 33%

Spirit Airlines Inc. (SAVE, Financial) is based in Miramar, Fla., located equidistantly between Fort Lauderdale and Miami. The company’s all-Airbus fleet currently operates more than 300 daily flights to more than 56 destinations across the United States, Caribbean and Latin America. They’ve been strategic, but let’s remember something before continuing down this rabbit hole.

Warren Buffett (Trades, Portfolio) has been very blunt regarding airlines, stating “investors have poured their money into airlines and airline manufacturers for 100 years with terrible results,” and his own NetJets has not performed as well as Berkshire’s other investments.

In fact in 2002, Buffett told The Telegraph, “If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You’ve got huge fixed costs, you’ve got strong labor unions, and you’ve got commodity pricing. That is not a great recipe for success. I have an 800 number now that I call if I get the urge to buy an airline stock. I call at 2 in the morning, and I say, ‘My name is Warren, and I’m an aeroholic.’ And then they talk me down.”

All that said, guru investors have been buying up airline stocks recently. Delta (DAL, Financial) has all the big names in it: George Soros, Leon Cooperman, Julian Robertson, David Tepper, Joel Greenblatt, Mario Gabelli. United (UAL, Financial) has some of the same names: Soros, Tepper, Greenblatt, Cooperman. And, as for American (AAL, Financial), Soros, Greenblatt, Whitney Tilson.

All must see something of value in the industry and especially with “Big Air.” However, I believe Spirit is the better bargain.

Financial highlights:

• Sales: $2.1 billion (up from $781 million in 2010)
• Income: $299 million (up from $72 million in 2010)
• Book: $16.06 per share (up from $6.10 in 2010)
• Cash: $748 million
• Debt: $537 million

Management has done an incredible job expanding gross margins to over 50%, absolutely crushing it with earnings of $4.10 over the last 12 months and resisting the urge to load up on debt and shares. It’s ridiculous that a growth company with a solid balance sheet trades at a forward P/E ratio of just 7, but such is life in this industry.

Compared to Delta, United and American (“Big Air”), Spirit has a much better cash-to-debt ratio, much higher margins and isn’t bloated with employees who may end up getting laid off in the event of a market downturn. This allows the company to offer $9 fares to members who pay up to $70 a year, as well as ultralow fares to passengers who aren’t checking luggage.

The company is also making investments that should help position the airline for long-term value growth including phasing out older planes to make room for new, more efficient aircrafts. Spirit is also giving its workforce more money, with a 25% uptick in salaries, wages and benefits this year. Plus, in the internet savvy age we live in, its website does a great job of selling bookings.

Fair value of $60-plus

Of course, this takes into account a 10% growth rate, which is low in my opinion. When adjusted to 15%, which basically means the earnings per share should double in five years, the fair value shoots up to $83. In either event the margin of safety is high enough to give investors downside protection and explosive capital appreciation, despite what Buffett may say about the industry as a whole.