Despite the resurgence of global travel and increased consumer spending, Spirit Airlines’ (NYSE:SAVE) performance has been disappointing. The failed merger with JetBlue (NASDAQ:JBLU) has led to a sizable stock sell-off, driving the shares down nearly 78% this year. Furthermore, issues like heavy debt, intense cash burn, and expectations of continued unprofitability in the short term place the company in danger of bankruptcy, despite the CEO’s recent assurances. It’s risky business for now, but can evolve to a hidden gem for value investors.
If management succeeds in turning things around, a potential value increase can occur. However, the outlook on the immediate future makes the stock unpredictable, while shares keep trading at a discount to industry peers.
Spirit Fights to Stay Up
Spirit Airlines is a provider of low-cost airline services. The company’s operations span 93 destinations in 15 countries across the United States, Latin America, and the Caribbean, with a fleet of 205 Airbus single-aisle aircraft.
The company has recently been grappling with significant challenges, including a failed merger with JetBlue Airways and an engine recall from Pratt & Whitney that could ground 70 planes by the end of 2025. Also threatening its immediate future is S&P’s recent bond downgrade to CCC+ junk status, meaning the company is considered a potential risk regarding its ability to default on its debt, and a looming $1.6 billion in debt due in 2025-26.
Despite these challenges, management has expressed an optimistic tone and is expanding its network in response to the steady growth in air travel demand. The company plans to grow its fleet to 215 aircraft by the end of 2024 and further to 219 by the end of 2025. Further, the company anticipates benefiting from falling fuel costs, with its average fuel cost per gallon expected to decrease to $2.80 in the second quarter of 2024, following a 15.5% decrease to $2.90 in the first quarter. This drop in fuel costs is expected to impact the company’s bottom line positively.
Spirit’s Recent Financial Results & Outlook
In Q1 of 2024, Spirit Airlines reported lower-than-expected results. Revenue of $1.265 billion slightly missed analysts’ expectations of $1.27 billion and marked a 6.2% year-over-year decline. The airline’s total revenue per available seat mile (TRASM) saw an 8.2% decline year-over-year on the back of a 2.1% increase in capacity. In comparison, revenue per passenger flight and fare revenue per segment decreased by 8.1% and 16.3%, respectively. Earnings per share were -$1.46, slightly under the estimated -$1.45.
The company ended the quarter with $1.2 billion in unrestricted cash, cash equivalents, and short-term investment securities. Noteworthy transactions in the period included the sale-leaseback of five aircraft yielding net cash proceeds of about $99 million and a $69.0 million payment from JetBlue following the termination of a merger agreement.
Management is estimating continuing weakness in the second quarter, with total revenue per available seat mile (TRASM) projected to be down 8% to 9.5% compared to last year’s second quarter on a capacity increase of about 2% year-over-year.
What Is the Price Target for SAVE Stock?
Analysts following the company have taken a bearish stance on the stock. For example, Citi analyst Stephen Trent recently reiterated a Sell rating on the shares while lowering the price target from $3.80 to $3.50. He noted the company’s struggles with increased pressures from other discount carriers in key markets, significant debt, and negative free cash flow.
Overall, Spirit Airlines is rated a Moderate Sell based on eight analysts’ recommendations and recently issued price targets. The average price target for SAVE stock is $3.21, representing a potential decline of -11.33% from current levels.
The stock has continued downward, shedding roughly 25% in the past 90 days. It trades at the bottom of its 52-week price range of $3.18 – $18.44 and continues to show negative price momentum, trading below its 20-day (3.64) and 50-day (3.92) moving averages. The slide in price has pushed the stock into relative value territory, with a P/S ratio of 0.07x comparing favorably to the airline industry average of 0.46x.
SAVE in Summary
It’s been a rough year so far for Spirit Airlines, exacerbated by a host of challenges. Despite this, the company remains committed to clawing its way back through strategic growth, and an expected fall in fuel costs could provide some respite. Yet, disappointing financial results and a bleak Q2 forecast have declined the share price close to 10%. While the stock trades at a discount, and there’s hope for a turnaround from the management, its immediate future remains foggy, making it a highly risky bet for investors.
