The airline sector has taken a beating on the whole because of several factors. A couple of underwhelming earnings reports led to the commencement of the downtrend, and President Donald Trump’s immigration policy added fuel to the fire. While some airlines stocks deserved a correction, a few of them were caught in the line of fire and unfairly punished. One is Spirit Airlines (SAVE, Financial).
Buying great companies on dips is an important rule to which most good value investors adhere. Spirit Airlines has dipped over 10% from its 52-week highs that it touched recently, and investors should make the most of it by adding to their positions. The company’s earnings report was decent and since the carrier only caters to travelers in the U.S., it will be unaffected by the recent ban. Thus, the recent 10% dip seems kind of irrational. Shrewd investors should consider adding to their positions.
With the company scheduled to report its quarterly earnings next week, investors have a golden opportunity to average down – or average up depending on when you bought the stock – and should definitely allocate funds to this carrier.
Since the aviation industry is a capital-intensive sector, it makes investing in the sector risky, especially with oil prices stabilizing. Investors should always pick airlines that are consistently working on bringing down costs and shrewd with their capital allocation. Spirit Airlines has proved that it has an effective business model, which was based on reducing costs and expanding in different markets.
According to recent reports, Spirit Airlines is working on reducing the size of its overhead cabin, which will effectively reduce the amount of space available for flyers to keep their baggage. Travelers whose bags are deemed to be oversized will have to pay for the luggage. Making customers pay for their necessities has worked well for Spirit Airlines until now, and I don’t see why this move will hurt the stock. With all the carriers charging money for bags, Spirit Airlines stands to benefit from this change.
Conclusion
Investors can be sure that Spirit Airlines will always look for ways to reduce costs and increase its profit margin, which is why it is a great stock in which to invest. People may hate the airline, but given that it operates in a small region, there will always be enough demand. Spirit Airlines is a buy.
Disclosure: No position.
Start a free seven-day trial of Premium Membership to GuruFocus.
