Since my previous article on Spirit Airlines (SAVE, Financial), its stock price has moved up from around $40 per share to $46 per share, a 15% increase. I believe the stock has more room to run in the future. In the past week, Spirit Airlines has released its 2015 10-K filing, and the business operating performance is quite encouraging.
The revenue has experienced a 10.8% rise from $1.93 billion in 2014 to $2.14 billion in 2015, mainly because of a 23.6% increase of non-ticket revenue, which includes baggage charges and passenger usage fees for booking through certain distribution channels. The declining oil price has helped to lower this airline’s fuel expenses, its single largest operating expense. Thus, the operating income surged by as much as 43.3% to more than $509 million this year. Its diluted EPS reached $4.38 per share on the total outstanding shares of 72.43 million.
The higher net income, large cash collection of flights sold but not yet flown, and higher deferrals of income taxes has boosted the company’s operating cash flow to $473 million. In 2015, Spirit Airlines spent nearly $549 million to purchase property and equipment, especially aircrafts. Out of the past three years, 2015 is the year that the company spent the biggest amount on investment in aircrafts. It purchased 14 aircraft and one spare engine sale-leaseback transaction during 2015. To finance the purchase of 14 aircraft, Spirit Airlines has incurred $536.8 million in long-term debt, pushing the total long-term debt to nearly $597 million. Most of the loans are due through 2027 with the average interest rate of 4.10%. I don’t think it’s a high interest rate, especially for the company that has consistently generated more than 20% return on equity. In 2015, Spirit Airlines’ return on equity reached nearly 28.5%, while the return on assets is also high at 15.4%.
Spirit Airlines is considered to be an ultra low cost carrier. Its total revenue per passenger is even below the breakeven cost of its competitors including Southwest (LUV, Financial) and JetBlue (JBLU, Financial). It also the airline that enjoys the highest operating margin at 23.8%. As most of its revenue comes via non-ticket revenue, it will accelerate the growth in the non-ticket segment. In the near future, Spirit Airlines will increase take rate through more customized pricing, offering more products for travellers and enhancing loyalty spending by improving passenger benefits and products. Indeed, if the company collect more from passengers in the non-ticket segment, it can offer passengers a very cheap base fare.
In 2015, Spirit Airlines generated around $400 million in free cash flow. At $46.6 per share, its market value stays at $3.35 billion. As of December 2015, it has more than $157.3 million in net cash, thus the enterprise value is $3.19 billion. With the free cash flow multiple of only 8x for the company, which has high return on equity over the past five years, I personally think Spirit Airlines is cheaply valued by the market at the current price.
Disclosure: Long SAVE.
