Spirit Airlines Stock Is Trading At An Attractive Price

The shares of Spirit Airlines (NYSE: SAVE) have gained 48% in the past month triggered by the likelihood of a quick recovery in air travel demand. We believe that there is a sizable upside in SAVE stock, which has lost 36% of its value since the beginning of the year and currently trades at $26. The company observed $130 million of operating cash outflow for the first nine months primarily supported by the $300 million grant under the CARES Act. Considering a $2 million of average daily cash burn rate, the company’s net debt is likely to increase by another $180 million during the fourth quarter. Therefore, the $1.7 billion drop in the company’s market capitalization looks unwarranted given the positive vaccine results released by Pfizer and Moderna. Our interactive dashboard highlights Spirit Airlines stock performance during the current crisis with that during the 2008 recession.

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2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 64% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system

In contrast, here’s how SAVE and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

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  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Spirit Airlines SAVE vs S&P 500 Performance Over 2007-08 Financial Crisis

SAVE stock was barely affected by the 2008 crisis and remained at a level of around $11.50 from October 2007 to December 2009. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.

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Spirit Airlines Fundamentals in Recent Years Look Stable

Spirit Airlines’ Revenues grew by 46% from $2.6 billion in 2017 to $3.8 billion in 2019, supported by capacity growth and ticket prices. Moreover, the company’s operating margins improved from lower fuel expenses and maintenance costs. However, the net earnings declined due to higher interest expenses resulting in an 18% reduction of EPS from $6.00 in 2017 to $4.90 in 2019. In Q3 2020, the company’s revenues fell by 60% (y-o-y) as the capacity (ASMs) dropped by 33% and the passenger load factor plummeted to 68%.

Does Spirit Airlines Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Spirit Airlines total debt increased from $1.4 billion in 2017 to $3 billion at the end of Q3 2020, while its total cash also surged from $1.8 billion to $2.1 billion over the same period. Considering a daily cash burn rate of $2 million, the company is in a good position to weather the crisis for more than a year.

CONCLUSION

Phases of Covid-19 crisis:

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  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Another round of payroll support for the airline industry, a sizable reduction in cash burn rate, and rollout of a vaccine are the key triggers for an upside in Spirit Airlines stock.

What if you’re looking for a more balanced portfolio instead? Here’s ahigh quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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