Amid the current market turmoil, picking stocks for long-term investing has proven to be a difficult task. While most of the stocks are in the red in 2016, Spirit Airlines (SAVE, Financial) is up over 8%.
I recommended Spirit Airlines a couple of months ago, and the stock has since appreciated almost 30%. Despite the uptick, Spirit Airlines has a lot of room to run higher, and it is a good buy despite the ongoing market correction.
The primary reason why Spirit is a good stock to buy is the fact that all the bad news is currently baked in its share price. Analysts are expecting Spirit to report double-digit revenue growth for FY2016 and FY2017. Despite the strong expected growth, Spirit Airlines is trading at 10x trailing earnings. With oil prices near multiyear lows, the Street is underestimating Spirit’s revenue and earnings growing ability.
The company’s Q4 indicates that it is in good shape to post strong growth heading forward. Spirit’s unique business model allows it to remain highly profitable irrespective of the price of crude. For the quarter, Spirit Airlines reported EPS of $1.02, beating the consensus target by 3 cents.
On the revenue front, Spirit’s top line jumped almost 10% year over year to almost $520 million, again beating the analysts’ estimate by roughly $1 million. The company also offset the falling air fares by reducing its cost per average seat mile by 8%.
With the company still expanding into several markets and oil prices near multiyear lows, it should continue witnessing record levels of profits in the coming quarters. However, Spirit is also well positioned to benefit from a rise in oil prices. Due to cheaper crude, the likes of American Airlines (AAL, Financial) have been able to compete with Spirit on price. However, if air fares start rising, ticket costs will go up as well, and Spirit’s unit revenue will rise with it.
Conclusion
Spirit may be the most hated airline in the U.S., but the stock is a great pick for bargain hunters. The company’s growth prospects are very bright; despite several tailwinds, Spirit is trading at just 10x trailing earnings. The company is nicely positioned to fight off competition from rivals like American Airlines and Southwest (LUV, Financial). Going forward, Spirit’s shares should move higher irrespective of the movement of crude.
Investors should buy the stock despite the recent uptick.
