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Introduction

Spirit Airlines (NASDAQ:SAVE) is a low-cost airline based in Miramar, Florida. Its current targeted growth markets are in Latin America. The company is likely to appreciate in valuation, making it a compelling investment opportunity.

Qualitative Analysis

Source: Information pertaining to Spirit Airlines came from the shareholder annual report

Spirit Airlines provide an affordable travel package for cost-sensitive travelers. Spirit Airlines has been able to maintain stable unit revenue while maintaining a low-cost structure. Spirit Airlines has been profitable for the past five years.

Spirit Airlines primary target growth markets are in the domestic U.S., Caribbean, and Latin America where they plan to stimulate traffic by reducing fares. The reduction in fares is how it will tap into the growth potential in price-sensitive travelers.

Spirit Airlines was founded in 1964 as Clipper Trucking Company. In 1974 it changed its name to Ground Air Transfer, Inc then beginning in 1983, started doing business as Charter One. In 1990, it received the Air Carrier Certificate from the Federal Aviation Administration and began air charter operations. In 1992, it renamed itself as Spirit Airlines, Inc. Thereafter it began adding scheduled passenger services to Fort Lauderdale, Detroit, Myrtle Beach, Los Angeles, and New York. In 1994 it reincorporated in Delaware, and in 1999 it relocated corporate headquarters to Miramar, Florida.

Spirit Airlines aggressively competes with: Republic Airways Holdings (NASDAQ:RJET), United Continental Holdings (NYSE:UAL), US Airways Group (LCC), Delta Air Lines (NYSE:DAL), JetBlue Airways (NASDAQ:JBLU), Southwest Airlines (NYSE:LUV), and many others.

The business model remains simple: Spirit Airlines opted to study low-cost airlines and concluded that an ultra-low-cost, low-fare business model focused on domestic routes within the United States and routes to the Caribbean and Latin America could be successfully implemented. Since 2006, Spirit Airlines built their corporate culture, vision, and product offerings under this low-cost thesis.

Technical Analysis

Since September Spirit Airlines has been trading within a narrow range between $16.00 and $18.00 per share. On December 5th Spirit Airlines broke above the descending triangle formation, establishing a trend reversal to the up-side.

(click to enlarge)

Source: Chart from freestockchart.com

While SAVE is consolidating on the price chart, I remain optimistic on price action. The stock recently broke above the descending triangle formation at 16.70. The stock is above the 20-Day Moving Averages. The stock is also below the 50 -, and 200- day Moving Averages. This is an indication that the stock is trading in a channel. The stock is trading on low volume, implying accumulation of stock.

Notable support is 15.75, 16.25, and 16.70 per share.

Notable resistance is 17.20, 18.80, 20.00, and 22.00 per share.

Street Assessment

Analysts on a consensus basis have reasonable expectations for the company going forward.

Growth Est

SAVE

Industry

Sector

S&P 500

Current Qtr.

-27.30%

66.40%

88.90%

8.30%

Next Qtr.

24.20%

279.80%

5086.20%

14.80%

This Year

6.10%

30.70%

206.30%

5.60%

Next Year

42.10%

38.70%

-37.50%

13.20%

Past 5 Years (per annum)

0.00%

N/A

N/A

N/A

Next 5 Years (per annum)

19.30%

29.89%

15.13%

9.14%

Price/Earnings (avg. for comparison categories)

11.86

42.61

17.21

13.71

PEG Ratio (avg. for comparison categories)

0.61

1.29

1.06

-0.01

Source: Table and data from Yahoo Finance

The company shows reasonable growth as analysts on a consensus basis have a 5-year average growth rate forecast of 19.3% (based on the above table).

Earnings History

11-Dec

12-Mar

12-Jun

12-Sep

EPS Est

0.32

0.32

0.47

0.35

EPS Actual

0.33

0.33

0.49

0.35

Difference

0.01

0.01

0.02

0

Surprise %

3.10%

3.10%

4.30%

0.00%

Source: Table and data from Yahoo Finance

The average surprise percentage is 2.6% above analyst forecast earnings over the past four quarters (based on the above table).

Forecast and History

Year

Basic EPS

2007

$ 0.05

2008

$ 1.29

2009

$ 3.23

2010

$ 2.77

2011

$ 1.44

Source: Table created by Alex Cho, data from shareholder annual report, and price history is from Yahoo Finance.

The EPS figure shows that throughout the 2007-2009 period revenue growth continued despite the great recession. This implies that the business model itself is impervious to cyclicality.

(click to enlarge)

Source: Table created by Alex Cho, data from shareholder annual report

By observing the chart we can conclude that the business offers inferior goods. Inferior goods experience more demand during recession and experience less demand during periods of prosperity. Imagine Family Dollar (NYSE:FDO) versus Nordstrom (NYSE:JWN), in this case Spirit Airlines is the Family Dollar. Higher-end brands do better when the economy grows. Despite that, analysts on a consensus basis anticipate growth in earnings as it is likely that Spirit Airlines will be able to compete using its low price point as its primary method of securing additional market share.

Spirit Airlines Forecast

Year (Dec 31st)

Basic EPS Forecast

Price forecast

2012

$ 1.32

$ 24.68

2013

$ 1.58

$ 29.58

2014

$ 1.90

$ 35.44

2015

$ 2.27

$ 42.46

2016

$ 2.72

$ 50.88

2017

$ 3.26

$ 60.96

Source: Forecast and table by Alex Cho

By 2017 I anticipate the company to generate $3.26 in earnings per share. This is because of earnings growth, improving global outlook, and continued success of their product offerings. To further clarify: Spirit Airlines is price competitive, global economy continues to recover, and analysts have forecasted reasonable yet strong growth for the company.

The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5-years.

(click to enlarge)

Source: Forecast and chart by Alex Cho

Investment Strategy

SAVE currently trades at 16.75. I have a price forecast of $24.68 for 2012, being that there are only 13-days before the end of 2012; the stock will fall short of the forecast. This means we should move to the long-run, and focus on 2012-2013. Previous price history indicates that SAVE will rapidly appreciate throughout the year. The stock may rapidly jump when it announces earnings for 4th quarter 2012 in 1st quarter 2013. It is likely that Spirit Airlines will continually appreciate up until it announces earnings.

Short Term

Over the next twelve months, the stock is likely to appreciate from $16.75 to $24.68-$29.58 per share. This implies 47-77% upside from current levels. The technical analysis indicates a trend-reversal to the up-side (break above the descending triangle formation). While the previously mentioned price forecast using fundamental analysis further supports the trade set-up.

Investors should buy Spirit Airlines at $16.75 and sell at $24.68 to pocket short-term gains of 47%.

Long Term

The company is an exceptional investment. I anticipate SAVE to deliver upon the price and earnings forecast despite the risk factors (competition). Spirit Airlines' primary upside catalyst is international growth, and price competition. I anticipate the company to deliver upon my forecasted price target of $60.96 by 2017. This implies a return of 263% by 2017. This rate of return is exceptional, considering Spirit Airlines has a market capitalization of $1.2 billion. The small market capitalization would be a sore spot for institutions that require higher liquidity. Therefore this investment opportunity is meant for smaller investors who are growth oriented.

Conclusion

The stock is compelling both over the long and short-term. I anticipate SAVE to beat the Standard & Poor's 500 in 2013 (the average return from equities is approximately 12% but Spirit Airlines will generate 47-77% in 2013). Spirit Airlines will be a great investment for many years ahead. The conclusion is simple: buy Spirit Airlines.

Source: Buy Spirit Airlines While It Is Trading At A Bargain