Shares of Spirit Airlines (NYSE:SAVE) were hammered since the company reported its disappointing Q1 earnings last month. The company's revenue of $493 million was up 12% year-over-year, but it just fell short of analysts' estimates of $494 million. However, the company's earnings per share of $0.96, up 8.5% year-over-year, were in line with the consensus target.
Although the earnings were in line, the company's reduced revenue guidance had the stock selling off. Over the conference call, Spirit's management said total revenue per available seat mile, or TRASM, is expected to decline about 15% in Q2. In addition, the company also revised the high end of its operating margin guidance downwards from 29% to 27%.
Consequently, the stock has lost close to 15% of its value since then. I believe the reaction was exaggerated and the pullback has presented an entry point for opportunistic investors. The fact that the company is trying to expand and generates a large portion of its revenue from non-ticket sales are two tailwinds, and investors should ignore the minor downward revision and concentrate on the company's long-term prospects.
Making the most of depressed oil prices
As I have stated in my previous article, low-cost carriers benefit the most from cheaper oil. Spirit Airlines is using the beaten-down prices to fight off competition by offering cheaper tickets, entering new markets, and increasing its fleet size. Spirit CEO Ben Baldanza commented on the company's expansion plans:
"We've announced 38 of the new routes to begin in 2015 and, over the last two fiscal quarters, we have added 12 new aircraft to our fleet all while improving our on-time performance and maintaining our high degree of reliability. Our consistent, reliable operational performance, solid track record in successfully launching new markets, and continued strong financial performance position us well for the year ahead."
Despite numerous expansion plans, the company's total expense jumped only 1.6%, thanks to a 38.7% dip in fuel prices. For the quarter, Spirit paid $1.95 per gallon for fuel. By comparison, JetBlue (JBLU) paid $2.06 per gallon. The company has capitalized on the beaten-down oil prices and is on track to expand its capacity by 30% in 2015. Although this may put downward pressure on the company's near-term margins, it will benefit the company in the long haul.
In addition, the company will not be badly affected by the rise in oil prices. Crude oil is inching up; however, given that Spirit offers the cheapest ticket and derives a lot of its revenue from non-ticket sales, it will not have to hike ticket costs as much as other airlines if oil moves higher. Hence, demand for Spirit Airlines will remain high even if oil costs surge higher in the coming months.
According to a recent study, price is the first thing that passengers consider when buying an airline ticket. Given that Spirit offers the cheapest tickets, its expansion plans should prove to be fruitful for long-term investors.
Source: Spirit Airlines
Valuation
Following the massive drop, Spirit Airlines is even more attractively priced. The company is trading at 11.9x forward earnings and has a PEG ratio of 0.50. In addition, the company's balance sheet is better than peers like JetBlue. Spirit Airlines has $741 million in cash, up 17.2% from the previous quarter, versus debt of $302 million. In addition, Spirit Airlines' operating margin stands at roughly 19% and is expected to grow to approximately 25% in 2015. For an airline company to boast a 25%+ operating margin is a commendable achievement. However, given the company's expansion plans and high dependence on non-ticket sales for revenue, this is easily achievable.
Conclusion
Following the pullback, Spirit Airlines is too cheap to ignore. The company's expansion plans, along with cheapest airfare, resonate well with the company's growth plan. In addition, the company's increasing operating margin is expected to grow at a good pace. Spirit also has a strong balance sheet and is trading at a discount value. Hence, I think Spirit Airlines is a strong buy on the pullback.
