With oil prices rising faster than air fares, airline stocks have reported weaker-than-expected Passenger Revenue per Average Seat Mile, or PRASM, as compared to the year-ago levels. Amid a weaker PRASM environment, airline stocks have fallen considerably over the last few months.
While the downfall is understandable to an extent, Spirit Airlines' (SAVE, Financial) selloff looks unjustified. Shares of Spirit Airlines have pulled back almost 20% from the year-to-date highs. Despite the company reporting better-than-expected earnings and increasing its operating margin guidance, shares of Spirit Airlines have plummeted in sympathy with other carriers.
While the drop may be frustrating for Spirit Airlines' investors, the recent pullback is a great buying opportunity. Investors should be optimistic and add to their Spirit Airlines positions after the recent unwarranted selloff.
Spirit Airlines has raised its operating margin guidance higher and has been delivering strong earnings growth over the last few quarters. Although the company has said it would sacrifice expansion in favor of improving the carrier’s public relations, the stock is a great long-term buy.
Getting rid of the “worst airline” tag will probably help Spirit Airlines in the long run, which is why the company’s decision to sacrifice expansion will be beneficial in the long run. In addition, Spirit Airlines’ unit cost has also been reducing. Although the recent rally in crude oil prices has increased Spirit’s unit cost, the company will likely benefit from the increase.
With oil moving higher, traditional carriers like American Airlines (AAL, Financial) will not be able to compete against Spirit on price anymore. A price war with American Airlines was the primary reason why shares of Spirit dipped from over $80 to under $50 last year.
However, with oil moving higher, Spirit Airlines is set to regain its competitive advantage of offering the lowest priced tickets.
Conclusion
Spirit Airlines has been executing on all fronts brilliantly, and the stock’s recent selloff is unjustified. Despite the company delivering on every front, shares are down roughly 20% from 2016 highs. The selloff has been fueled by other carriers reporting weaker-than-expected PRASM. However, Spirit Airlines’ outlook is still unchanged, and the stock is a terrific buy at current levels.
Disclosure: The author doesn’t have any position in the stock mentioned in the article.
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