Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Spirit Airlines Inc (SAVE, Financial). The stock, which is currently priced at 13.06, recorded a loss of 11.1% in a day and a 3-month decrease of 27.27%. The stock's fair valuation is $35.22, as indicated by its GF Value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Considering the Risk Factors
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Spirit Airlines should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.53. These indicators suggest that Spirit Airlines, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding Altman Z-score
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Inside Spirit Airlines
Spirit Airlines Inc serves the United States, Latin America, and Caribbean as an airline operator. It primarily offers customers unbundled base fares to strip out any unneeded travel amenities. If needed, a customer can elect for additional options at an extra charge. Flight crews are entirely interchangeable across all aircraft, and maintenance and other support services are simplified due to not having an overly complex fleet. The company has one operating segment, air transportation, owing to its system-wide route structure. It may decide to expand its network if a market is underserved or overpriced. The majority of revenue is derived from the United States.
Spirit Airlines's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Spirit Airlines's Altman Z-score reveals Spirit Airlines's financial health may be weak, suggesting possible financial distress:
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Spirit Airlines's historical data, 2021: 0.13; 2022: 0.09; 2023: 0.03, we observe a declining trend in this ratio. This downward movement indicates Spirit Airlines's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
Conclusion
Despite the seemingly attractive valuation of Spirit Airlines (SAVE, Financial), the company's weak financial health, as reflected by its low Altman Z-score, suggests it might be a potential value trap. Thus, investors should think twice before investing in Spirit Airlines. Thorough due diligence is essential to avoid falling into such value traps.
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
