You’re supposed to buy when there’s blood in the streets, right? Not always, as the seemingly nonstop drop in Spirit Airlines (NYSE:SAVE) stock is happening for good reasons. The outlook is hazy for Spirit Airlines, and the company’s future as a viable business enterprise may be limited, so I am bearish on SAVE stock.
Spirit Airlines is known as a low-cost airline carrier. It’s certainly not the most popular airline in the U.S., and as we’ll discuss later, the analyst community isn’t particularly bullish on Spirit Airlines stock.
Even if you happen to be a contrarian investor, this isn’t an ideal time to go on a rescue mission to save SAVE stock. So, get your parachute ready, as we’re about to see some heavy turbulence in the headlines.
Spirit Airlines Stock: Two Days of Horror
Sometimes, after a stock nearly gets cut in half, you might expect a bounce the next day. That didn’t happen with Spirit Airlines stock, however, as it lost close to 50% of its value on Tuesday and then dropped another ~24% today.
That additional 24% sell-off didn’t seem to be prompted by any additional news. Rather, it looked like stock traders were mulling the implications of a long-anticipated court ruling that didn’t go in Spirit Airlines’ favor.
Here’s the scoop. Previously, the U.S. Justice Department launched a lawsuit against JetBlue Airways (NASDAQ:JBLU) and Spirit Airlines to block JetBlue’s proposed buyout of Spirit. The Justice Department cited concerns over anticompetitive practices, claiming that airfares would likely go up as a result of the proposed merger. Notably, JetBlue and Spirit are the sixth- and seventh-largest airlines in the U.S.
Nevertheless, SAVE stock bulls hoped that Boston-based U.S. District Judge William Young wouldn’t side with the Justice Department. Week after week, investors on both sides of the trade wondered when Young would finally make a ruling as to whether he would allow or block JetBlue’s merger with Spirit Airlines.
The news came hard and fast yesterday, with Young finally deciding to block the acquisition. In his ruling, Young wrote that the proposed buyout “does violence to the core principle of antitrust law: to protect the United States’ markets – and its market participants – from anticompetitive harm.”
Young also specifically referred to airfare prices, declaring, “The consumers that rely on Spirit’s unique, low-price model would likely be harmed.” Interestingly, while SAVE stock plunged on the news yesterday, JetBlue stock actually went up nearly 5%. Perhaps this was the market’s way of expressing relief that JetBlue wouldn’t end up paying $3.8 billion for Spirit’s assets.
The Next Chapter for Spirit Airlines May Be Chapter 11
Frankly, I just can’t get on board with the buy-the-dip crowd when it comes to Spirit Airlines stock. The outlook is too unclear for Spirit Airlines, and bankruptcy is a distinct possibility. This, I suspect, is why the stock continued to lose value today.
First of all, Young’s rejection of the JetBlue-Spirit merger is probably the final nail in the coffin for the proposed buyout. To quote Deutsche Bank (NYSE:DB) analysts, “We now see a very, very low probability of the merger being consummated.”
If you’re thinking that SAVE stock is now a terrific deal because its valuation is depressed, don’t be too eager to make a hasty trade. Just because a company’s valuation just went down a lot doesn’t always mean it’s due for a rebound. As JPMorgan Chase (NYSE:JPM) analyst Jamie Baker put it, “We see little valuation support for Spirit in the absence of a merger.”
Ultimately, it’s wise to consider the bearish argument presented by TD Cowen analyst Helane Becker, who envisions Spirit Airlines filing for Chapter 11 and then liquidating its assets. SAVE has considerable debt, and an earnings recovery for the company seems unlikely at this point.
Furthermore, if you expect Spirit Airlines to survive by restructuring, Becker doesn’t want you to get your hopes up. “We recognize this sounds alarmist and harsh. But the reality is we believe there are limited scenarios that enable Spirit to restructure,” the TD Cowen analyst warned.
The point is that Spirit Airlines has few viable options besides an eventual bankruptcy filing. Instead of Spirit Airlines getting back on its feet and thriving, Melius Research analyst Conor Cunningham cautioned that the “path forward for Spirit turns to survivability.”
Is SAVE Stock a Buy, According to Analysts?
On TipRanks, SAVE comes in as a Hold based on four Holds and one Sell rating assigned by analysts in the past three months. The average Spirit Airlines stock price target is $12.25, implying 64.2% upside potential.
Conclusion: Should You Consider SAVE Stock?
Bargain hunting is an activity that should be done with forethought and research. A lot was riding on the hopes that JetBlue would acquire Spirit Airlines. Those hopes are basically out the window now, and Spirit Airlines may have to file for Chapter 11 this year.
Consequently, prospective investors shouldn’t count on any miracles happening with Spirit Airlines this year. I often like to buy stocks when they’re trading at a discount, but I just don’t see any compelling reasons to consider owning SAVE stock now, and I’m definitely not recommending it.
