Revisiting Spirit Airlines

The stock has been stagnant for the last 6 months, but growth is coming

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Feb 26, 2018
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While I’m not a fan of airline stocks, I am an advocate for trading intelligently when you are invested in a position. And, with many investors following the current Warren Buffett airline trade, I wanted to revisit Spirit Airlines (SAVE, Financial). The reason is mainly based on the results of Allegiant Travel (ALGT, Financial) in the last 15 months.

I wrote my first article on Allegiant Nov. 17, 2016, when the stock was trading around $165. Ten months later, I revisited it with a call to dollar cost average on Sept. 19, 2017, at $120. A hundred shares at $160 and 130 shares at $120 would have put you $31,600 into the stock. Today, with the stock north of $170, you’d be up $7,500 plus $370 in dividends. That’s a profit of 25%. Granted, that’s still slightly less than the gain on the S&P 500 over the same time. However, the dollar cost average trade at $120 has produced better, 42%, while the S&P has only gained 9.7%. So, net net, it was the right thing to do.

That being said…

Last summer (July 31 to be precise) I wrote an article that stated "Spirit Airlines is a Buy Again." The stock had fallen to a 52-week low because of canceled flights tied to the feud with pilots where the union and company were $1.5 billion apart in a new labor deal. At the time, the price was $39.

Six months later and the stock is at the exact same level, but the company has continued to produce positive financial results. In the fourth quarter, the company posted better-than-expected earnings and sales results, excluding the one-time income tax credit worth $199 million or $2.90 per share. Dynamic seat pricing and bundled services were among the primary drivers of that beat. The fourth quarter and first quarter are usually the lowest for profit, but going into 2018, the company is looking to earn $4.30 a share.

There’s no reason for the multiple to be this low, at just nine times forward earnings. Historically, the company has grown fast and warranted a price to earnings ratio above 17x. However, the majority of its routes are heavily concentrated in the northeastern part of the U.S. Spirit plans to increase capacity 23% in 2018 by making midsize cities a key aspect of its growth strategy as well as focusing more on international destinations.

Adding routes in the South and West Coast could also help the airline continue its historic growth pace by competing with smaller carriers like Southwest (LUV, Financial) instead of the big guns of United (UAL) and Delta (DAL). This is not likely to create a price war as air fares at these carriers are already ultra low with thin margins. Also, it’s a different customer base entirely -- the kind that are perfectly fine with no-frills.

At the start of 2015, the stock traded in the $70s. Since then, the company has built in another $700 million in annual revenue turnover and booked over $1 billion in net profit. With a market cap of $2.74 billion, as long as the earnings continue to come in, the company is worth at least double. As for the pilot union negotiation, Spirit has reached a tentative deal which could mean an increase of $120 million in pay over the next five years. It’s a far better and more reasonable deal than what was on the table last summer, and voting is set to conclude at the end of this month. In the meantime, Spirit is a bargain.

Disclosure: I am not long/short any stock mentioned in this article.